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The American Prospect - articles by authorenA Needless Defaulthttp://prospect.org/article/needless-default
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>This article appears in the Winter 2015 issue of <em>The American Prospect</em> magazine. <a href="https://ssl.palmcoastd.com/21402/apps/ORDOPTION1LANDING?ikey=I**EF1"><strong>Subscribe here</strong></a>.</p>
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<p><em><strong>AFTER HER STROKE</strong>, Alice Emile of Freeport, New York, wanted to die at home. On April 24, 2009, she passed away quietly at the age of 74. Her son Darrell Emile, executor of the estate, had to close the reverse mortgage she took out in 2006, which had passed into the hands of Bank of America.</em></p>
<p><em>A Bank of America representative told Emile he would receive a payoff document within six months, and have six additional months to determine the best way to settle the account. This is considered standard for reverse mortgage closings. But in October 2009, a bank representative claimed that they had never received word that Emile’s mother had died (even though, by this time, the bank was addressing letters about the house to “the Estate of Alice Emile”). After Emile faxed Bank of America the death certificate, for what he says was the third time, the bank informed him that the account was in default.</em></p>
<p><em>Emile had the money to settle the mortgage, and would have had he simply received a payoff document. But Bank of America never delivered one, and they refused his offers to pay afterward, instead filing for foreclosure in May 2010. Since Emile cannot get a payoff document, he cannot sell<br />the home, which is stuck in limbo awaiting completion of foreclosure. The estate did, however, benefit in April 2013 from the Independent Foreclosure Review, a Federal Reserve–led settlement designed to compensate homeowners for foreclosure errors. The check was for $300.</em></p>
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<p><span class="dropcap">P</span>oliticians, economists, and commentators are debating the causes of the rise in inequality of income and wealth. But one primary cause is beyond debate: the housing collapse, and the government’s failure to remedy the aftermath. According to economists Emmanuel Saez and Gabriel Zucman, the bottom 90 percent of Americans saw one-third of their wealth wiped out between 2007 and 2009, and there has been no recovery since. This makes sense, as a great deal of the wealth held by the middle and working classes, particularly among African Americans and Hispanics, is in home equity, much of which evaporated after the bubble popped. The effects have been most severe in poor and working-class neighborhoods, where waves of foreclosure drove down property values, even on sound, well-financed homes. Absent a change in policy, Saez and Zucman warn, “all the gains in wealth democratization achieved during the New Deal and the postwar decades could be lost.”</p>
<p>President Obama will carry several legacies into his final two years in office: a long-sought health care reform, a fiscal stimulus that limited the impact of the Great Recession, a rapid civil rights advance for gay and lesbian Americans. But if Obama owns those triumphs, he must also own this tragedy: the dispossession of at least 5.2 million U.S. homeowner families, the explosion of inequality, and the largest ruination of middle-class wealth in nearly a century. Though some policy failures can be blamed on Republican obstruction, it was within Obama’s power to remedy this one—to ensure that a foreclosure crisis now in its eighth year would actually end, with relief for homeowners to rebuild wealth, and to preserve Americans’ faith that their government will aid them in times of economic struggle.</p>
<p>Faced with numerous options to limit the foreclosure damage, the administration settled on a policy called HAMP, the Home Affordable Modification Program, which was entirely voluntary. Under HAMP, mortgage companies were given financial inducements to modify loans for at-risk borrowers, but the companies alone, not the government, made the decisions on whom to aid and whom to cast off.</p>
<p>In the end, HAMP helped only about one million homeowners in five years, when ten million were at risk. The program arguably created more foreclosures than it stopped, as it put homeowners through a maze of deception designed mainly to maximize mortgage industry profits. More about how HAMP worked, or didn’t, in a moment.</p>
<p>HAMP cannot be justified by the usual Obama-era logic, that it represented the best possible outcome in a captured Washington with Republican obstruction and supermajority hurdles. Before Obama’s election, Congress specifically authorized the executive branch, through the $700 billion bank bailout known as TARP, to “prevent avoidable foreclosures.” And Congress pointedly left the details up to the next president. Swing senators like Olympia Snowe (Maine), Ben Nelson (Nebraska), and Susan Collins (Maine) played no role in HAMP’s design. It was entirely a product of the administration’s economic team, working with the financial industry, so it represents the purest indication of how they prioritized the health of financial institutions over the lives of homeowners.</p>
<p>Obama and his administration must live with the consequences of that original sin, which contrasts with so many of the goals they claim to hold dear. “It’s a terrible irony,” said Damon Silvers, policy director and special counsel for the AFL-CIO, who served as deputy chair of the Congressional Oversight Panel for TARP. “This man who represents so much to people of color has presided over more wealth destruction of people of color than anyone in American history.”</p>
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<p><em><strong>ANDREW DELANY</strong>, a licensed carpenter from Ashburnham, Massachusetts, was diagnosed with a spinal disorder a couple weeks before the financial crisis of September 2008. He immediately sought mortgage help, but his lender, Countrywide, told him to call back after the presidential election. By then, Delany had no savings left. “You do all the paperwork to get a HAMP or a HARP or a hope and some help,” Delany says, referring to the government-sponsored programs for mortgage modifications. His letters to Countrywide, and then Bank of America after they purchased Countrywide, were often returned unopened.</em></p>
<p><em>Delany fought for three years, acting as his own lawyer because he could not afford one, before the bank was allowed to foreclose at the end of 2011. Bank of America then suddenly withdrew the foreclosure. The loan servicing got sold to a debt collector, who has refused to take Delany’s calls. They could restart foreclosure on Delany at any time, but he’s not leaving. “I have nothing to lose but my house,” Delany says.</em></p>
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<p><span class="dropcap">T</span>he Obama administration legacy on housing policy began before he entered office. By the time of Lehman Brothers’ failure in September 2008, defaults on subprime loans had spiked significantly. A critical mass of Democrats in Congress refused to agree to TARP unless some portion got devoted to keeping people in their homes. (The Obama Treasury Department would eventually devote $50 billion of TARP funds to this purpose, of which only $12.8 billion has been spent, more than five years later).</p>
<p>The most direct and effective policy solution to stop foreclosures is to allow bankruptcy judges to modify the terms of primary-residence mortgages, just as they can modify other debt contracts. This is known in the trade as “cramdown,” because the judge has the ability to force down the value of the debt. The logic of bankruptcy law reduces debts that cannot be repaid in order to serve a broader economic interest, in this case enabling an underwater homeowner to keep the house. Liberal lawmakers believed the threat of cramdown would force lenders to the table, giving homeowners real opportunities for debt relief. Wall Street banks were so certain they would have to accept cramdown as a condition for the bailouts that they held meetings and conference calls to prepare for it.</p>
<p>But although then-Senator Obama endorsed cramdown on the campaign trail, he supported a bailout package that deferred the provision until after the elections. Donna Edwards, then a freshman congresswoman, received a personal commitment from candidate Obama that he would pursue cramdown at a later date, and it swung her vote for the bailout. On January 15, 2009, Obama’s chief economic policy adviser, Larry Summers, wrote to convince Congress to release the second tranche of TARP funds, promising that the incoming administration would “commit $50-$100 billion to a sweeping effort to address the foreclosure crisis … while also reforming our bankruptcy laws.” But the February 2009 stimulus package, another opportunity to legislate mortgage relief, did not include the bankruptcy remedy either; at the time, the new administration wanted a strong bipartisan vote for a fiscal rescue, and decided to neglect potentially divisive issues. Having squandered the must-pass bills to which it could have been attached, a cramdown amendment to a housing bill failed in April 2009, receiving only 45 Senate votes.</p>
<p>Senate Majority Whip Dick Durbin, who had offered the amendment, condemned Congress, declaring that the banks “frankly own the place.” In fact, the administration had actively lobbied Congress against the best chances for cramdown’s passage, and was not particularly supportive when it came up for a vote, worrying about the impacts on bank balance sheets. Former Treasury Secretary Timothy Geithner admitted in his recent book, “I didn’t think cramdown was a particularly wise or effective strategy.” In other words, to get the bailout money, the economic team effectively lied to Congress when it promised to support cramdown.</p>
<p>The administration’s eventual program, HAMP, grew out of the banking industry’s preferred alternative to cramdown, one where the industry, rather than bankruptcy judges, would control loan restructuring. Unfortunately, the program has been a success for bankers and a failure for most hard-pressed homeowners.</p>
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<p><em><strong>IN 2005, HURRICANE WILMA</strong> blew down the auto repair shop that James Elder and his brother had owned for 25 years. He had just refinanced into a new mortgage on his home in West Palm Beach, Florida, weeks earlier, through National City Bank. A subsequent business failed in the wake of the Great Recession, and by January 2009, Elder had to default on his mortgage loan payments.</em></p>
<p><em>He tried to get a loan modification through HAMP when the program came out in March 2009, but National City (which would eventually be purchased by PNC Bank) “dual tracked” him. One division of the bank began foreclosure proceedings while another appeared to be negotiating the loan modification in good faith. Elder sent in paperwork six times, and on two occasions got firm agreements for a modification, but both agreements fell through. He has almost never talked to a human being at his mortgage servicer during the last five years.</em></p>
<p><em>PNC voluntarily withdrew the case, and then re-filed it years later. Another hearing was pending as we went to press. “I don’t know what the outcome will be; we’re ready either way,” Elder says. “I don’t deny that I owed the money. All I wanted was a fair shake. Help never came for the homeowners.”</em></p>
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<p><strong>Absentee Owned:</strong> In the crisis, there are too many repossessions, not enough refinancings.</p>
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<p><span class="dropcap">I</span>n appreciating how HAMP failed homeowners, it’s important to understand the role of “servicers.” We’re no longer in the age of <em>It’s a Wonderful Life</em>; your lender does not hold onto your mortgage anymore. During the housing bubble, most loans were sold to intermediaries, packaged into securities, and passed off to bond investors, such as pension funds. Servicers were hired to process monthly payments, handle day-to-day contact with homeowners, and distribute the proceeds along to the investors. Servicers also decide when to foreclose and when to modify loans, making them the key to HAMP’s success.</p>
<p>Servicers, basically glorified accounts-receivable departments staffed by line-level workers making relatively low wages, can eke out a profit as long as they never need to perform any customer service. They had neither the expertise nor the resources to handle millions of individual requests, no matter how much money the Treasury offered them to modify loans. “There was no way HAMP could have worked on the scale that it would have needed to work,” says Max Gardner, a bankruptcy lawyer and an expert on foreclosures. “You’re trying to turn servicers into underwriters.” From the first waves of the foreclosure crisis, it was clear that servicers had no capacity to fulfill this role.</p>
<p>The Treasury Department, which engineered HAMP, compounded the problem by making the program exceedingly complex, tweaking it on the fly with new rules and guidelines. This sprung from their consuming obsession with ensuring that only “worthy” borrowers received modifications, perhaps spurred on by Rick Santelli’s proto–Tea Party rant against undeserving homebuyers. The preoccupation with moral hazard was targeted at homeowners instead of banks, creating overlapping income and asset double-checks to weed out the unworthy and placing more burdens on overstretched servicers.</p>
<p>Worse yet, servicers have their own financial incentives that run counter to the modest incentive payments in HAMP. Servicers make their money based on a percentage of unpaid principal balance on a loan. Forgiving principal—the most successful type of loan modification—eats into servicer profits, so servicers shy away from principal reduction, preferring less effective interest rate cuts. Plus, servicers collect structured fees—such as late fees—which make it profitable to keep a borrower delinquent. Even foreclosures don’t hurt a servicer, because they make back their portion of fees in a foreclosure sale before the investors for whom they service the loan. The old manner of mortgage lending gave everyone a stake in keeping homeowners in their homes; now, the incentives are all mismatched.</p>
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<p><strong>Defending Lenders:</strong> HUD Secretary Shaun Donovan and Treasury Secretary Tim Geithner, with dissenter Sheila Bair of the FDIC</p>
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<p>If HAMP’s goal was truly to prevent foreclosures, there is no good explanation for why the program operates the way it does. Servicers couldn’t handle a minimal caseload, let alone a byzantine program. The incentive problems between loan owners and loan servicers were well known. But if HAMP could give homeowners enough hope that they could save their home by making a few more payments, the Treasury could prevent outright defaults or deeper principal reductions from crashing the value of mortgage-backed bonds and derivatives, many of which were held by banks. So bank balance sheets, not homeowner fortunes, took priority.</p>
<p>HAMP defenders often cite the enormous complexity in the structure of mortgage ownership as a reason for the program’s failure to deliver more relief to homeowners. But bank bailouts were just as difficult to negotiate, says Amir Sufi, professor of finance at the University of Chicago’s Booth School of Business. “Those programs got done,” Sufi says. “Programs to help homeowners never did.”</p>
<p>Other officials found ways to manage mortgage relief. Former FDIC chair Sheila Bair engineered a kind of dry run of HAMP in 2008, when her agency took over the failed subprime lender IndyMac. Needing to salvage a cascade of bad loans and prevent a foreclosure epidemic, Bair initiated a very different process. “Basically, we sent you a letter saying based on our records, we’re giving you a new mortgage payment at 31 percent of your income,” Bair says. “What you need to do is sign this form, give the first month’s check, a W2, and the name of your employer. It’s like a couple pages. Then you got your loan mod [modification].”</p>
<p>The Treasury’s HAMP design was infinitely more cumbersome, effectively sabotaging the program before it got started. “We would have helped unworthy borrowers, but did that matter at that point?” Bair asks. “We helped unworthy banks too.”</p>
<p>Servicers quickly discovered that they could game HAMP in their own interest, using it as a kind of predatory lending program. One tactic was to chronically lose borrowers’ income documents to extend the default period. “I’m doing a book now,” Bair says, “and [in] almost every family I interviewed, servicers had lost their paperwork at least once.” Prolonged “trial modifications” allowed servicers to rack up payments and late fees while advancing the foreclosure process behind the borrower’s back. They could then trap the borrower after denying the modification, demanding back payments, missed interest, and late fees, using the threat of foreclosure as a hammer. “They created a situation where the borrower would start making the payments, end up not getting the modification, and still go into foreclosure,” Bair says.</p>
<p>This pattern happened with disturbing regularity. According to a recent Government Accountability Office report, 64 percent of all applications for loan modifications were denied. Employees at Bank of America’s mortgage servicing unit offered perhaps the most damning revelations into servicer conduct. In a class-action lawsuit, these employees testified that they were told to lie to homeowners, deliberately misplace their documents, and deny loan modifications without explaining why. For their efforts, managers rewarded them with bonuses—in the form of Target gift cards—for pushing borrowers into foreclosure.</p>
<p>Because of all this, HAMP never came close to the 3–4 million modifications President Obama promised at its inception. As of August 2014, 1.4 million borrowers have obtained permanent loan modifications, but about 400,000 of them have already re-defaulted, a rate of about 30 percent. The oldest HAMP modifications have re-default rates as high as 46 percent. And HAMP modifications are temporary, with the interest rate reductions gradually rising after five years. The first rate resets began this year.</p>
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<p><em><strong>KIM THORPE</strong>, whom everyone knows as KT, answered her door one day to find the sheriff of Harrison, Maine, handing her foreclosure papers. “This has to be wrong, I just made the payment,” Thorpe told him.</em></p>
<p><em>That was in March 2010. Citi Mortgage, which services the loan, has taken Thorpe to court on multiple occasions, but the servicer keeps voluntarily dismissing the cases before trial. Citi Mortgage continues to call Thorpe to collect a debt, which they claim has ballooned to $157,000. But Citi has never found the documents to prove standing to foreclose, which Thorpe never tires of telling them. “When they know that you don’t fear them, you’ve taken away their power,” she says.</em></p>
<p><em>Citi can still try to locate the proper documents and pursue foreclosure again. In the meantime, Thorpe is fighting stage three breast cancer. She and her husband have separated and their kids have moved out. “It’s a house now, not a home,” she says. But she continues to wait for the bank’s next move.</em></p>
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<p><span class="dropcap">T</span>he cynical view is that HAMP worked exactly to the Treasury’s liking. Both Senator Elizabeth Warren and former Special Inspector General for TARP Neil Barofsky revealed that then-Secretary Geithner told them HAMP’s purpose was to “foam the runway” for the banks. In other words, it allowed banks to spread out eventual foreclosures and absorb them more slowly. Homeowners are the foam being steamrolled by a jumbo jet in that analogy, squeezed for as many payments as they can manage before losing their homes.</p>
<p>HAMP facilitated such a scheme perfectly. Giving discretion on modifications to mortgage servicers meant that they would make decisions in their own financial interest. No losses would be forced on the owners of the loans, and no principal forgiveness would be made mandatory. The system, by design, worked for financial institutions over homeowners.</p>
<p>The Obama administration “viewed foreclosures as an instrument of housing markets clearing,” Damon Silvers says. “And they thought foreclosures were unavoidable, in order to maintain the fiction that these loans were worth what banks said on the balance sheet.”</p>
<p>Silvers explains that only minimal taxpayer funds, far less than the total needed, were devoted to preventing foreclosures; banks never had to kick in their own share. “In order for the economy to be revived, we needed to write down the principal on these loans,” he says. “The decision that was made amounted to debt peonage on U.S. families to the benefit of the banks.”</p>
<p>Indeed, the administration missed or delayed several opportunities to provide relief and prevent foreclosures while also boosting the economy. During the 2008 presidential debates, John McCain proposed a $300 billion plan to buy up mortgages and renegotiate their terms, similar to the Depression-era Home Owner’s Loan Corporation. There were also bipartisan calls for a mass refinancing program for underwater homeowners, which would save them billions in monthly payments. Ultimately, the administration never tried to buy mortgages (though plenty of hedge funds did), and their refinancing program didn’t produce even its meager results until 2012, years after the crisis erupted.</p>
<p>Two critical moments perfectly illustrate the Treasury’s priorities on HAMP and housing. First, the department laid out precise program guidelines—in a thick handbook—that banned many of the practices in which servicers engaged. But the Treasury never sanctioned a servicer for contractual non-compliance, and never clawed back a HAMP incentive payment, despite documented abuse. In the summer of 2011, the Treasury temporarily withheld incentive payments, but they would eventually hand over all the money. If the program had actually put borrowers first, they could have used sanctions to force better outcomes.</p>
<p>Then, in October 2010, it was revealed that, in order to verify standing to foreclose, servicers forged and backdated assignments, and “robo-signed” affidavits attesting to their validity without any knowledge of the underlying loans. Almost immediately, the top five servicers paused their foreclosure operations. Nobody knew how much legal liability servicers had, but with state and federal law enforcement investigating and potentially trillions of dollars in mortgages affected, the numbers were expected to be high.</p>
<p>At the FDIC, Sheila Bair immediately saw this as an opportunity. “When robo-signing raised its ugly head, I sent a proposal to Tim [Geithner],” Bair says. “I called it a super-mod. Any loan that’s more than 60 days delinquent, take it down to face value—just take it down. Write off that principal. And if they held onto the house and kept making their mortgage payment, any subsequent appreciation they would have had to share with the lenders. But just take it down.”</p>
<p>But the Treasury didn’t use this newfound leverage to force losses onto the banks. Instead, they were more concerned with a “global settlement” with bankers to defuse the issue, limit bank losses, and make the situation manageable for the perpetrators.</p>
<p>After a perfunctory investigation, state and federal officials reached an agreement with the top five servicers, called the National Mortgage Settlement. Despite claims that a million homeowners would get principal reductions as a result, in the end only 83,000 received such help. Other settlements for fraudulent conduct delivered no jail time, the payment of penalties with other people’s money, empty promises to never misbehave again, and cash awards to victims that were so low some didn’t even bother to cash the checks. The administration refused to use the leverage from bank mistakes to the benefit of borrowers, because they didn’t want to hurt banks. “We were just seeing the world through two different prisms,” Bair says.</p>
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<p><em><strong>MIKE MALLEO </strong>of Manasquan, New Jersey, refinanced into an infamous “Pick-a-Pay” loan from World Savings Bank in 2005, which offered a low teaser rate. Years later, his late wife contracted stage four pancreatic cancer, and the subsequent medical bills, loss of wages, and eventual reset of the interest rate made it impossible to afford the mortgage.</em></p>
<p><em>A settlement with the New Jersey attorney general over Pick-a-Pay mortgages entitled Malleo to a loan modification. But Malleo never received relief, despite applying on four separate occasions. Instead, Wells Fargo told him to stop paying so as to qualify for HAMP, but then used that default to file for foreclosure, sell the property to the bank itself, and set an eviction date of August 21, 2014.</em></p>
<p><em>Weeks before eviction, Malleo received a letter from Home Start Housing Center promising they could get him out of foreclosure. After submitting his information, Home Start sent him an offer—on Wells Fargo stationery—approving him for a HAMP modification with a lower monthly payment.</em></p>
<p><em>Malleo sent in his payment, but that day, two sheriffs and a moving truck came to evict him from the house. Wells Fargo claims to have never heard of Home Start. After initially insisting that Wells Fargo must accept the terms of the approved modification, days later Home Start returned his check and rescinded the offer. Malleo moved out of the house October 1. “The web of deceit is overwhelming,” Malleo says. “The embarrassment, the disgrace that has occurred is amazing.”</em></p>
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<p><span class="dropcap">W</span>e’re still in a foreclosure crisis, five years after the technical end of the Great Recession. While leading indicators like delinquencies and foreclosure starts have fallen from their peak, they remain “at nearly three times the normal level,” says Sam Khater, deputy chief economist at housing specialist CoreLogic. More than 8.7 million homeowners remain underwater, with the borrower owing more than the home is worth, and more than half a million families will lose their homes this year under current trends. More troubling, delinquencies and foreclosure starts have inched back up in recent months. In August, analyst RealtyTrac found that foreclosure auctions increased for the first time in 44 months, and foreclosure filings in the third quarter of 2014 also jumped, breaking a three-year string of declines.</p>
<p>This new foreclosure activity is not concentrated in new loans, which have very low default rates. The problem is practically all legacy loans from bubble-era mortgages sold on houses that had unsustainably high prices and appraisals to people struggling with stagnant wages and financial insecurity. In other words, the crisis was never solved; it was deferred. In the coming years, two million loan modifications, including HAMP loans, will face higher interest rate resets, and 800,000 of those loans are underwater. Another foreclosure spike is a distinct possibility.</p>
<p>Banks have also decided to finally cut through their foreclosure backlog, after modest increases in the value of real estate made it more attractive to them to seize the homes. In Florida, money from the National Mortgage Settlement that is supposed to help borrowers instead funds foreclosure courts, which have a stated directive to dispose of cases and get to evictions, regardless of the history of lender abuses. “The courts have been corrupted and co-opted like we’d never imagine,” says Matt Weidner, a foreclosure defense attorney in Tampa.</p>
<p>Mortgage servicers remain beset with the same scarce resources, wrongheaded financial incentives, and unprepared staffs. The Consumer Financial Protection Bureau recently released evidence of servicers violating new rules that the CFPB put in place in January 2014, including failure to execute loan modification agreements, incorrect reports to credit agencies, and misrepresentation of borrower options. In October, New York banking regulator Ben Lawsky found that mortgage servicer Ocwen backdated thousands of loan modification denial letters to avoid a 30-day appeal process (an old Bank of America trick).</p>
<p>Foreclosures before courts now often feature robo-witnesses, entry-level employees with no knowledge of the underlying loans, who come to court reading a script attesting to the veracity of the servicer’s claims. “The biggest result of the robo-signing controversy has been to move it into the courtroom,” says Thomas Ice, a Florida defense lawyer who exposed robo-signing in several depositions in 2010. “They don’t give their signature, they just perjure themselves in court.”</p>
<p>The persistent crisis, and the lack of sanctions for anyone responsible for misconduct, continues to weigh down the economy. As Amir Sufi and Atif Mian’s groundbreaking research shows, consumer spending fell hardest in the areas where home prices dropped the most, particularly poor areas where people of color were preyed on by the subprime lending industry. More foreclosures fueled heavier price declines, creating a vicious cycle. The consequent destruction of wealth led to reduced demand from over-indebted borrowers, contributing to a pervasively weaker economic recovery. And lower net worth means less consumption going forward, particularly in housing. “This permanent scar has been left on the middle class,” Sufi says.</p>
<p>The Obama administration’s most recent attempt at a solution is to loosen lending restrictions to jump-start the housing market. That trades financial instability for a short-term housing stimulus, and could put homeowners in significant peril. “Everyone’s on board with allowing debt to build up during a boom,” Sufi says, “but we now know afterwards, policymakers will leave people out to dry. You’re going to suffer losses and not get any forgiveness.”</p>
<p>Americans implicitly understand this. Household formation has been “disturbingly slow” since the Great Recession, says former Fannie Mae housing economist Tom Lawler. Homeownership rates have descended to 1995 levels, according to the Census Bureau, with the losses concentrated most in Generation X, which bore the full impact of the foreclosure crisis. Housing ordinarily leads an economic recovery—but not this one. Part of this weakness is caused by low income growth and depressed housing prices that feed on themselves. But there are psychological as well as economic scars from millions of foreclosures. Amid the carnage, people have naturally shied away from placing their wealth in a volatile asset like a home.</p>
<p>Perhaps the worst legacy of the failure to stop the crisis is the impact on trust in government itself. HAMP’s predatory lending schemes reinforced the old Ronald Reagan dictum that the most dangerous words in the English language are “I’m from the government and I’m here to help.” How do you tell families who signed up for an aid program that ended up actively harming them to ever believe in government again?</p>
<p>Particularly for a president like Obama, who entered office on a promise of activist government, with ardent backing from communities of color victimized by the crisis, the decision to protect banks over homeowners was debilitating. A tide of cynicism swept out Democrats in the last midterm elections, with voters more skeptical than ever that government can solve problems, or take the people’s side over the financiers. Two-thirds of voters in exit polls found the economy to be rigged for the wealthy.</p>
<p>“The consequence of these decisions was the disillusionment of his base in believing that political action is going to work,” says Damon Silvers. “They weakened the Obama presidency in ways he could never recover from.”</p>
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</div></div></div>Mon, 09 Feb 2015 04:45:10 +0000221649 at http://prospect.orgDavid DayenA Chance to Remake the Fedhttp://prospect.org/article/chance-remake-fed
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span class="dropcap">J</span>anet Yellen has only chaired the Federal Reserve for a few months, but you could forgive her if she feels like the new kid in school that nobody wants to sit with at lunchtime. With the <a href="http://www.federalreserve.gov/newsevents/press/other/20140403a.htm">resignation of Jeremy Stein</a> earlier this month, there are only two confirmed members of the seven-member Board of Governors: Yellen and Daniel Tarullo. Three nominees—Stan Fischer, Lael Brainard and Jerome Powell, (whose term expired but has been re-nominated)—await confirmation from the Senate. Another two slots are vacant, awaiting nominations. One consequence of the shortage of Fed governors is that regional Federal Reserve Bank presidents, chosen by private banks, now outnumber Board members at monetary policy meetings, allowing the private sector to effectively dictate monetary policy from the inside, and creating what some call a <a href="http://www.politico.com/magazine/story/2014/04/federal-reserve-constitutional-crisis-105663.html?hp=r3#.U1EkZ3m5fwJ">constitutional crisis</a>.</p>
<p>The need for two more nominees, however, provides an opportunity to reunite the progressive coalition that <a href="http://www.washingtonpost.com/business/economy/larry-summers-withdraws-name-from-fed-consideration/2013/09/15/7565c888-1e44-11e3-94a2-6c66b668ea55_story.html">prevented Larry Summers</a> from <a href="http://prospect.org/article/next-battle-fed">getting nominated</a> as Fed Chair last year. By pursuing a nominee dedicated to tougher oversight of the financial industry, reformers can make their mark on the central bank for years to come. But it was much easier to reject a known quantity like Summers, especially with an obvious, historic alternative in Yellen. Who will progressives demand this time to represent their interests at the Fed?</p>
<p>An odd tradition has sprung up organically at the Fed, in which open seats are unofficially earmarked for certain coalitions and interest groups. Elizabeth Duke’s <a href="http://www.federalreserve.gov/newsevents/press/other/20130711a.htm">resignation</a> last year created an opportunity to fill the “community banker seat,” for example, and senators in both parties have <a href="http://online.wsj.com/news/articles/SB10001424052702303873604579492020075708360">asked</a> for someone with community banking experience to replace her. There are seats traditionally designated for academic economists and international banking experts, and seats for people with Wall Street experience, all so the Board can cover its bases and have a go-to expert for each of its various responsibilities. Maybe the Fed, with such a powerful role to play in the economy, shouldn’t get assembled like the <a href="http://en.wikipedia.org/wiki/Super_Friends"><em>Super Friends</em></a>, but that’s how it’s traditionally been done.</p>
<p>Since 2010, progressives could take heart in a public interest/consumer protection seat, held by Sarah Bloom Raskin, Maryland’s former chief banking regulator. But the White House basically made that seat disappear in the aftermath of the <a href="http://prospect.org/article/eternal-summers">Yellen-Summers brouhaha</a>. President Barack Obama nominated Raskin to the number two job at the Treasury Department, and replaced her with Lael Brainard, a Treasury official from the Tim Geithner era and a loyal soldier for the Administration’s viewpoint, which has tended to be more moderate on financial reform issues. Stan Fischer fulfilled the academic and international banking monetary policy roles (in addition to bringing Wall Street cred to the table, thanks to his former position as a <a href="http://www.nytimes.com/2014/03/13/business/economy/stanley-fischer-fed-nominee-has-long-history-of-policy-leadership.html?_r=0">senior executive at Citigroup</a>). Neither nominee carries the same understanding of the relationship between financial markets and ordinary people as Raskin does. The Stein resignation offers a chance to revive the “Main Street seat,” and install somebody focused on protecting the public.</p>
<p>Raskin’s absence can be felt in recent regulatory decisions. Since Yellen’s term as chair began, the Fed has certainly <a href="http://www.bloomberg.com/news/2014-01-10/warren-says-she-expects-yellen-will-boost-fed-s-bank-oversight.html">focused more on financial regulation</a> than it did in previous years, <a href="http://www.businessinsider.com/warren-questions-yellen-in-confirmation-2013-11">taking control</a> of decision-making from the staff level and giving it regulation the status of an unofficial third mandate, behind full employment and price stability. But so far, that focus has mostly amounted to rhetoric; the actions have been a mixed bag. </p>
<p>On the positive side, the Fed <a href="http://www.bloomberg.com/news/2014-03-26/citigroup-fails-fed-stress-test-as-goldman-bofa-modify-plans.html">rejected Citigroup’s plan</a> to increase its shareholder dividend after the financial giant failed a <a href="http://www.investopedia.com/terms/b/bank-stress-test.asp">stress test</a>. And last week, the Fed released rules for the “<a href="http://www.vox.com/2014/4/14/5610548/the-enhanced-supplementary-leverage-ratio-is-your-new-bicycle">supplementary leverage ratio</a>,” which limits how much the eight largest banks can borrow, a way to reduce risk and ensure that Wall Street can pay for its own losses, rather than taxpayers.</p>
<p>However, the leverage rules are modest; they really only limit big bank borrowing to $95 for every $100 it lends out, instead of $97. Plus, the rule <a href="http://daviddayen.tumblr.com/post/82304274905/on-leverage-ratios-watch-the-dates">doesn’t take effect until 2018</a>, giving lobbyists ample opportunity to weaken it further. On the same day as the leverage ratio announcement, the Fed <a href="http://www.reuters.com/article/2014/04/07/us-fed-volcker-idUSBREA361R820140407">delayed part of the Volcker rule</a>, giving banks two more years to divest themselves of collateralized loan obligations, packaged securities of risky loans which have <a href="http://www.salon.com/2014/03/26/the_next_financial_crisis_looms_heres_where_it_may_come_from/">become all too prevalent</a> of late. </p>
<p>Yellen herself has said that <a href="http://www.spokesman.com/stories/2014/apr/16/janet-yellen-says-fed-reviewing-regulations/">more stringent rules</a> may be needed to limit the conditions that triggered the 2008 financial crisis, but the middling approach she has taken thus far suggests she doesn’t have the right colleagues with the courage to face down Wall Street and make it happen. While Daniel Tarullo is the point person for financial regulation, he needs allies that can nudge him toward deeper reforms and shift the center of gravity on these issues. </p>
<p>Progressives had enough power to stop Summers, but moving from opposition to proposition forces them to coalesce around a specific individual to replace Stein, which hasn’t yet happened. There are some obvious names available. Sheila Bair, former head of the Federal Deposit Insurance Corporation (FDIC), would serve nicely in a reform role, as would Simon Johnson, the previous chief economist for the International Monetary Fund (IMF), a stalwart on the need to <a href="http://economix.blogs.nytimes.com/2014/04/17/the-end-of-our-financial-illusions/?_php=true&amp;_type=blogs&amp;ref=business&amp;_r=0">effectively regulate the financial system</a>. Both of these prospects have enemies inside the White House, but they are also eminently qualified for the job and would give ordinary Americans a voice inside a powerful institution.</p>
<p>Other alternatives would be easier to get past the White House. Jared Bernstein, the former chief economist to Vice President Joe Biden, has been floated, though he focuses more on full employment than financial regulation. Andrew Green, legislative counsel to Sen. Jeff Merkley (D-OR), is another possibility; during the Dodd-Frank debate, he helped write the Volcker rule.</p>
<p>One possible name who could get widespread support is Elise Bean, the chief counsel on the Senate Permanent Subcommittee on Investigations chaired by Sen. Carl Levin (D-MI), which has churned out several aggressive reports detailing the perfidy of banks like <a href="http://www.bloomberg.com/news/2011-04-14/goldman-sachs-misled-congress-after-duping-clients-over-cdos-levin-says.html">Goldman Sachs</a> and <a href="http://www.huffingtonpost.com/2013/03/15/london-whale-hearing-carl-levin_n_2883719.html">JPMorgan Chase</a>. Bean has respect on both sides of the aisle and a wealth of knowledge about how the financial system works in the real world. Many reformers, who preferred to remain anonymous amid ongoing discussions on the matter, consider Bean the leading choice. </p>
<p>Even the “<a href="http://www.businessweek.com/news/2014-04-09/white-house-said-to-consider-community-bankers-for-fed-s-board">community banker seat</a>” could result in a strong financial regulator. Thomas Honeig, currently vice-chair of the FDIC, is an <a href="http://www.nytimes.com/2010/04/18/opinion/18hoenig.html">outspoken proponent</a> of tighter regulation, and has been instrumental in the few stronger reforms that have taken place. He has the support of the Independent Community Bankers Association, stemming from his past as a community bank examiner and the president of the Kansas City Federal Reserve, the only district composed entirely of community banks.</p>
<p>Hoenig, an old-line Republican, has a reputation as a hawk on monetary policy and inflation, but he would be outnumbered in that perspective on the Fed board, and some believe his strength and influence on financial regulation outweigh the monetary policy issues. He would force Tarullo to consider more radical measures, and give a community bank perspective on industry consolidation and the resulting abuses to consumers.</p>
<p>Appointments such as these could have a major impact well into the future, especially if the nominees pledge to serve full 14-year terms. Lately, Fed governors have <a href="http://www.thefiscaltimes.com/Columns/2014/04/08/Who-s-Blame-Power-Shift-Fed">served fewer years</a>, with Jeremy Stein’s tenure one of the shortest on record. (Stein likely saw he would have less influence without his Harvard colleague Summers as Chair, and quickly departed.) But with a longer commitment, financial reformers could establish a long-standing presence at the central bank, well into the next few presidential terms.</p>
<p>This will require consensus among progressives, who found it easy to oppose Summers for Yellen, but must now determine who exactly to support, and how to force agreement from an Administration that got its way on the last set of nominees. The Administration knows control of the Senate is in peril, and the window of opportunity to make its mark on the Federal Reserve is closing fast. Progressives can leverage this, and restore the Main Street seat.</p>
<p>This would establish the principle that the Fed has a responsibility not only to use monetary policy to keep the economy moving, but to use regulatory policy to keep a lid on the capital markets. Ironically, it was Stein who tried to merge these two, suggesting that the Fed <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/08/should-the-fed-pop-bubbles-by-raising-interest-rates/">raise interest rates</a> to depress asset bubbles. That choice to <a href="http://www.nextnewdeal.net/rortybomb/what-would-financial-instability-argument-look-any-other-industry">deliberately decelerate</a> the economy would harm ordinary people, and reveals the Fed’s blind spots toward Main Street. There’s an opportunity to reverse that; progressives simply need to flex their muscles again.</p>
</div></div></div>Mon, 21 Apr 2014 13:51:07 +0000220164 at http://prospect.orgDavid DayenWall Street’s Subsidy Safety Nethttp://prospect.org/article/wall-street%E2%80%99s-subsidy-safety-net
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span class="dropcap">F</span>inancial reformers in both parties have insisted for years that the largest banks remain too big to fail, and that Dodd-Frank did not cleanse the system of this reality. You can mark down this week as the moment that this morphed into conventional wisdom. In successive reports, two of the more small-c conservative economic institutions, without any history of agitating for financial reform—the Federal Reserve and the International Monetary Fund—both agreed that mega-banks, in America and abroad, enjoy a lower cost of borrowing than their competitors, based on the perception that governments will bail them out if they run into trouble. This advantage effectively works as a government subsidy for the largest banks, allowing them to take additional risks and threaten another economic meltdown. With institutional players like the Fed and the IMF both identifying the same problem, Wall Street grows more and more isolated, setting up the possibility of true reform.</p>
<p><span style="line-height: 1.538em;">The idea that big banks can borrow more cheaply makes intuitive sense. Say you’re an investor with the option of lending money to a big bank or a smaller one. If you know that, in the event of catastrophe, the smaller institution will get swallowed up by the FDIC without an investor payoff, while the big bank will get protected with a taxpayer bailout, of course you would feel that your money is safer with the big bank. Therefore, investors ask for higher interest rates from smaller banks, because of the greater risk of losses. This also distorts market discipline, as investors have no reason to worry about excessive risk-taking at a too-big-to-fail bank if the government will clean up the mess regardless. Even if the government insists that the era of bailouts has ended, the mere </span><em style="line-height: 1.538em;">perception</em><span style="line-height: 1.538em;"> by investors about the safety of their funds in a too-big-to-fail bank drives borrowing costs lower.</span></p>
<p>Federal Reserve <a href="http://www.newyorkfed.org/research/epr/2014/1403sant.pdf">research</a>, put out last week as part of the annual Economic Policy Review, makes the historical case for this disparity. Using a twenty-four year dataset, João Santos of the Federal Reserve Bank of New York argues that the largest banks have a cost advantage “consistent with the hypothesis that investors believe the banks are ‘too big to fail.’” Santos compared bonds of similar characteristics issued by banks of all sizes, and calculated that larger banks, on average, raise money at interest rates between 0.31 and 0.41 percent lower than their smaller counterparts.</p>
<p>This sounds small, but when you consider the hundreds of billions in that the average mega-bank borrows in a typical year, the amounts can add up. If you multiply that figure by the total liabilities of the top ten U.S. banks, it equals as much as $45 billion a year in subsidy, around half of the mega-banks’ annual profits (previous data put the subsidy at <a href="http://www.bloombergview.com/articles/2013-02-20/why-should-taxpayers-give-big-banks-83-billion-a-year-">almost twice as much</a>). Santos broadened the investigation by looking at the firms outside the banking sector, and found that their borrowing advantage relative to smaller competitors does not hold when comparing similar types of bonds. “These results suggest that the cost advantage… is unique to banks,” Santos writes.</p>
<p>The problem is that the dataset goes from 1985 to 2009, ending before passage of Dodd-Frank and its implementation. Therefore, this data alone, while confirming the existence of a consistent borrowing advantage for big banks over time, cannot answer whether Dodd-Frank fixed the problem and eliminated the subsidy. However, additional Fed research, using data through 2013, showed that the largest banks <a href="http://libertystreeteconomics.newyorkfed.org/2014/03/do-too-big-to-fail-banks-take-on-more-risk.html">take bigger risks than their peers</a>, suggesting that they still rely on the likelihood of government aid if they fall into crisis.</p>
<p>The IMF <a href="http://www.imf.org/External/Pubs/FT/GFSR/2014/01/pdf/c3.pdf">report</a> looked at banks all over the world, and just to make things more confusing, they used the term “too important to fail” rather than the more common idiom. But they arrived at much the same conclusion as the Federal Reserve, even when analyzing data from after 2009. In fact, because we have a test case for whether governments will seek bailouts—the massive support handed to banks in the wake of the 2008 financial crisis—the IMF believes that the problem “has likely intensified.” Banks have grown more concentrated since 2008, and as the IMF notes, they did so by responding to the major incentives to grow: the bailout protection and the borrowing subsidy.</p>
<p>In general, the IMF found a much larger subsidy for banks in Europe than in the United States; judged by their estimates, European mega-banks look like complete wards of the state. However, when comparing bonds of similar types issued by U.S. banks, the borrowing advantage did show up as anywhere between $15 and $70 billion, depending on the methodology used to calculate it.</p>
<p>This represents a decline from the peak of the crisis, when the borrowing advantage was much higher. And the potentially smaller finding than the Federal Reserve suggests that Dodd-Frank made some difference in investor expectations, reducing the subsidy. But in all cases, the cost advantage seen in post-crisis data was <em>larger</em> than the advantage from before the crisis. In other words, the experience of the bailout meant more to investors in cementing the notion of government protection for big banks than any of the regulatory actions taken after the bailout. In all, the IMF estimated that governments around the world provide <a href="http://www.ft.com/intl/cms/s/0/60f1c218-b8b2-11e3-835e-00144feabdc0.html">$590 billion annually</a> in implicit subsidies to mega-banks because of their too-big-to-fail status. “The expected probability that systemically important banks will be bailed out remains high in all regions,” the report concludes.</p>
<p>In combination, the papers from the IMF and the Fed provide powerful ammunition for reformers to rebut their critics at the big banks. In general, banks and their lobbyists have taken the line that Dodd-Frank solved the problem. In fact, a couple weeks before these reports, the financial consultant Oliver Wyman <a href="http://www.oliverwyman.com/insights/publications/2014/mar/do-deposit-rates-show-evidence-of-too-big-to-fail-effects.html">put out their own report</a> asserting that too-big-to-fail subsidies no longer exist. The report was financed by the Clearing House Association, a consortium <a href="http://en.wikipedia.org/wiki/Clearing_House_Association">representing 17 of the world’s largest banks</a>.</p>
<p>If this were a fight just between financial reformers and bank-funded studies, perhaps the debate would endure without resolution. But when the IMF and the Federal Reserve weigh in, it has the effect of a referee judging the debate. And both of them clearly sided with the reformers, agreeing that the subsidies remain and that policy reforms since the financial crisis have not succeeded in eliminating them.</p>
<p>With the debate basically over, the question arises of what to do about the implicit subsidy and the excessive risk to the economy that goes along with it. Senators Sherrod Brown and David Vitter have carried bipartisan <a href="http://www.brown.senate.gov/newsroom/press/release/brown-vitter-unveil-legislation-that-would-end-too-big-to-fail-policies">legislation</a> for nearly a year that would increase capital requirements for the biggest banks, effectively ensuring that they pay for their own bailouts. More wide-ranging reforms would cap the size of the largest institutions at a certain percentage of GDP. And in his tax reform proposal, Republican Dave Camp drew from an idea dropped from the final version of Dodd-Frank, suggesting a <a href="http://online.wsj.com/news/articles/SB10001424052702303287804579445583212447244">tax on the biggest financial firms</a> to finance future bailouts.</p>
<p>There’s little chance of any of these solutions gaining traction in this election year. However, financial reformers can only be helped in the future by the end of the debate over whether mega-banks derive a <a href="http://www.bloombergview.com/articles/2014-03-31/how-our-big-banks-really-make-their-money">substantial portion of their profits</a> from government subsidies. The idea that banks benefit from government largesse offends the sensibilities of both parties, for different reasons. Wall Street is now virtually alone in denying reality, and this should aid efforts to finally solve the problem.</p>
</div></div></div>Fri, 04 Apr 2014 13:05:56 +0000220063 at http://prospect.orgDavid DayenThe Home Mortgage Business, Where Cheaters Always Seem to Prosperhttp://prospect.org/article/home-mortgage-business-where-cheaters-always-seem-prosper
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span class="dropcap">O</span>cwen is a little company with a dream: to become the nation’s largest mortgage servicer. If they weren’t so uniformly terrible at mortgage servicing, they might even achieve that goal. And while state and federal investigations, multi-billion-dollar fines, and legal threats would seemingly throw a wrench in most companies’ high-minded plans for success, Ocwen is different. Because in America, rank incompetence need not impede a corporate quest, at least not in the financial services industry. As cracks in its public image continue to surface, Ocwen is attempting to pull off one of the most brazen schemes in recent memory: getting what amounts to a cash advance for the very work they can’t seem to do properly.</p>
<p><span style="line-height: 1.538em;">Let’s take a step back. Ocwen is the biggest of a group of “non-bank” servicers, which don’t originate loans themselves. They merely handle the day-to-day accounting of loans for other owners, usually big institutional investors—collecting monthly payments, making decisions on loan modifications and pursuing foreclosures when necessary. Previously, the lion’s share of mortgage servicing operations were housed within the biggest Wall Street banks. But those institutions were caught committing massive amounts of fraud in the foreclosure process, and were forced to pay </span><a href="http://www.nationalmortgagesettlement.com" style="line-height: 1.538em;">tens of billions</a><span style="line-height: 1.538em;"> in fines. Legal settlements in the wake of this conduct led to a new set of servicing standards that increased compliance costs. And new global capital rules gave </span><a href="http://www.mbaa.org/files/CommunityBank/CommunityBankBaselIIISummary.pdf" style="line-height: 1.538em;">unfavorable treatment</a><span style="line-height: 1.538em;"> to mortgage servicing rights (or MSRs, as they are commonly known), making the business a balance sheet liability.</span></p>
<p><span style="line-height: 1.538em;">Big banks consequently wanted to sell off their MSRs, and Ocwen and other non-bank financial firms stepped in to purchase them. Ocwen suddenly became the fourth-largest mortgage servicer in America, </span><a href="http://www.ft.com/intl/cms/s/0/03c29384-94c6-11e3-9146-00144feab7de.html?siteedition=uk#axzz2tEPPYMtj" style="line-height: 1.538em;">growing 300 percent in two years</a><span style="line-height: 1.538em;"> by picking up MSRs from </span><a href="http://www.bloomberg.com/news/2011-06-06/goldman-sachs-agrees-to-sell-litton-unit-to-ocwen-for-264-million-in-cash.html" style="line-height: 1.538em;">Goldman Sachs</a><span style="line-height: 1.538em;">, </span><a href="http://www.bloomberg.com/news/2011-10-24/morgan-stanley-will-sell-saxon-mortgage-servicing-unit-to-ocwen-financial.html" style="line-height: 1.538em;">Morgan Stanley</a><span style="line-height: 1.538em;">, </span><a href="http://www.housingwire.com/articles/ocwen-buys-15b-chase-mortgage-servicing-rights" style="line-height: 1.538em;">JPMorgan Chase</a><span style="line-height: 1.538em;">, </span><a href="http://finance.yahoo.com/news/ocwen-buy-ally-banks-msrs-170833293.html" style="line-height: 1.538em;">Ally Bank</a><span style="line-height: 1.538em;">, and </span><a href="http://www.housingwire.com/articles/16997" style="line-height: 1.538em;">Bank of America</a><span style="line-height: 1.538em;">. They are now the nation’s largest servicer of subprime mortgages. Overall, banks have sold off the servicing rights to over $1 trillion worth of loans since 2011.</span></p>
<p><span style="line-height: 1.538em;">The idea behind the government settling with big bank servicers was that the industry would finally have to treat homeowners fairly, thanks to the new standards for conduct. Instead, banks passed around servicing rights like a hot potato to companies like Ocwen, who were not bound by any settlement terms. Until recently, non-bank servicers were almost completely unregulated and had </span><a href="http://www.nakedcapitalism.com/2013/08/cfpb-examiners-find-mortgage-servicing-business-remains-a-sewer.html" style="line-height: 1.538em;">no processes to comply</a><span style="line-height: 1.538em;"> with regulations. Homeowners, who cannot choose their servicer, effectively got traded from one fraudulent set of banks to an even more shadowy, more fraudulent set of financial firms.</span></p>
<p><span style="line-height: 1.538em;">Predictably, Ocwen turned out to be good at buying MSRs, but bad at customer relations, following the law, or math. In December of 2013, the Consumer Financial Protection Bureau (CFPB) </span><a href="http://www.newrepublic.com/article/116010/ocwen-mortgage-fraud-settlement-servicer-fined-homeowner-abuse" style="line-height: 1.538em;">accused Ocwen</a><span style="line-height: 1.538em;"> of “violating consumer financial laws at every stage of the mortgage servicing process,” including routine overcharging, deliberate misplacing of homeowner documents, denying eligible borrowers loan modifications, forcing the purchase of unnecessary insurance policies, and so on. CFPB settled with Ocwen for $2 billion in principal reductions for Ocwen borrowers, which didn’t bother Ocwen much since they don’t own the loans anyway, and as such don’t take the hit when the principal gets cut.</span></p>
<p><span style="line-height: 1.538em;">By now we should be used to financial institutions receiving no penalty for criminal misconduct that harms hundreds of thousands of ordinary Americans. But state and federal regulators managed to take a special interest in Ocwen, damaging their reputation if not their profits. Benjamin Lawsky, superintendent of New York’s Department of Financial Services, </span><a href="http://www.reuters.com/article/2014/02/06/wellsfargo-ocwen-mortgages-idUSL2N0LB1DQ20140206" style="line-height: 1.538em;">indefinitely stopped</a><span style="line-height: 1.538em;"> a $2.7 billion MSR purchase between Ocwen and Wells Fargo (Ocwen happens to be chartered as a bank in New York state, giving regulators jurisdiction). Lawsky questioned whether Ocwen could handle the additional servicing load, probably because they couldn’t legally manage any of the other servicing they’ve ever purchased. “We need to make sure that these MSR transfers do not put homeowners at undue risk,” Lawsky said at the New York Bankers Association this month. “We have a vital responsibility to protect consumers.”</span></p>
<p><span style="line-height: 1.538em;">This blockage of the Wells Fargo deal created serious problems for Ocwen. Because they don’t make loans, Ocwen’s business is completely dependent on purchasing more and more MSRs. Older loans get paid off or refinanced or slip into foreclosure, meaning the business continually shrinks without fresh MSR injections. Unlike the CFPB settlement, Lawsky actually threatened Ocwen’s underlying business model.</span></p>
<p><span style="line-height: 1.538em;">And Lawsky wasn’t alone. Two weeks ago, investors in mortgage-backed securities who own loans serviced by Ocwen let it be known that they were </span><a href="http://www.ft.com/cms/s/0/bdc6bc26-9271-11e3-9e43-00144feab7de.html#ixzz2t4xd3KN9" style="line-height: 1.538em;">considering suing the servicer</a><span style="line-height: 1.538em;">.. Ocwen had a nasty habit of not telling the investors—their bosses—anything about their servicing practices, which often damaged the value of the securities, especially when they led to unnecessary foreclosures. Investors also managed to figure out that they would end up paying all those CFPB fines against Ocwen.</span></p>
<p><span style="line-height: 1.538em;">More slings and arrows followed. </span><em style="line-height: 1.538em;">The New York Times</em><span style="line-height: 1.538em;"> </span><a href="http://dealbook.nytimes.com/2014/02/18/loan-complaints-by-homeowners-rise-once-more/?_php=true&amp;_type=blogs&amp;_r=0" style="line-height: 1.538em;">highlighted Ocwen</a><span style="line-height: 1.538em;"> in a study of non-bank servicing and the recurrence of wrongful evictions and homeowner abuse. </span><em style="line-height: 1.538em;">The Financial Times</em><span style="line-height: 1.538em;"> </span><a href="http://www.ft.com/intl/cms/s/0/03c29384-94c6-11e3-9146-00144feab7de.html?siteedition=uk#axzz2tEPPYMtj" style="line-height: 1.538em;">noted</a><span style="line-height: 1.538em;"> that Ocwen’s offshore tax havens allowed them to enjoy an effective tax rate of just 12 percent. Representative Maxine Waters </span><a href="http://dealbook.nytimes.com/2014/02/19/lawmaker-urges-u-s-regulators-to-scrutinize-mortgage-servicers/?_php=true&amp;_type=blogs&amp;_r=0" style="line-height: 1.538em;">urged federal regulators</a><span style="line-height: 1.538em;"> to scrutinize all MSR sales to ensure companies like Ocwen “have the operational capacity to manage the increased volume.” And CFPB Deputy Director Steven Antonakes, in </span><a href="http://www.consumerfinance.gov/newsroom/deputy-director-steven-antonakes-remarks-at-the-mortgage-bankers-association/" style="line-height: 1.538em;">remarks</a><span style="line-height: 1.538em;"> before the Mortgage Bankers Association last week, delivered a remarkable broadside against the entire mortgage servicing industry, telling executives to expect tough examination and no leniency. Antonakes didn’t mention Ocwen by name, but he coincidentally highlighted almost every one of the fraudulent practices CFPB accused Ocwen of in December. “The notion that government intervention has been required to get the mortgage industry to perform basic functions correctly—like customer service and record keeping—is bizarre to me but, regrettably, necessary,” Antonakes said.</span></p>
<p><span style="line-height: 1.538em;">Despite all this, last week—amid a time of severely diminished public confidence, when Ocwen’s </span><a href="https://www.google.com/finance?q=NYSE:OCN&amp;sa=X&amp;ei=bDoMU973No66oQTWx4LgAQ&amp;ved=0CCkQ2AEwAA" style="line-height: 1.538em;">stock price</a><span style="line-height: 1.538em;"> fell from $43.62 to $33.65 before bouncing back—Ocwen decided to </span><a href="http://www.housingwire.com/articles/28969-ocwen-to-sell-mortgage-servicing-rights-in-capital-markets" style="line-height: 1.538em;">float</a><span style="line-height: 1.538em;"> a derivative offering that mirrored the kinds of securities that blew up the global economy back in 2008. Under a proposed deal called OASIS, Ocwen would package into bonds a sliver of the MSRs they’ve been scooping up faster than Little Bunny Foo Foo </span><a href="http://en.wikipedia.org/wiki/Little_Bunny_Foo_Foo" style="line-height: 1.538em;">scoops up field mice</a><span style="line-height: 1.538em;">. They would effectively get an advance on their business operations, paying back bondholders with revenue from mortgage servicing over a number of years.</span></p>
<p><span style="line-height: 1.538em;">Think about this: Ocwen has shown nothing but contempt for actually servicing mortgages, yet they want to securitize them. It’s like a dishwasher going to a restaurant owner to get an advance on years of salary—though the analogy only works if the dishwasher spends her days breaking every dish she washes. Apparently, some things are even too cynical for Wall Street, as investors priced the OASIS bonds “</span><a href="http://www.housingwire.com/articles/29047" style="line-height: 1.538em;">under expectations</a><span style="line-height: 1.538em;">,” offering Ocwen far less than they wanted. But Ocwen hasn’t cancelled the deal as of yet, and regulators have yet to say a peep about this highly unorthodox approach.</span></p>
<p><span style="line-height: 1.538em;">I wish that the combination of corruption, ineptitude, and chutzpah on display here were only limited to Ocwen. Sadly, the whole business model of mortgage servicing invites such conduct. Servicing is a “high-touch” business, requiring lots of personnel to deal with troubled homeowners; the labor costs are fixed and simply cannot be automated away. The meager compensation structure rewards companies that defraud their customers to generate fees, as well as those that </span><a href="http://www.nclc.org/images/pdf/pr-reports/report-servicers-modify.pdf" style="line-height: 1.538em;">foreclose on homeowners</a><span style="line-height: 1.538em;"> instead of modifying delinquent loans. A servicing executive was a </span><a href="http://www.housingwire.com/articles/29047" style="line-height: 1.538em;">bit too honest</a><span style="line-height: 1.538em;"> recently when he said, “improving loan performance has become something of a two-edged sword as ancillary fees have significantly decreased, as well as other revenue-producing opportunities.” To translate from financier to English, homeowners actually making their payments hurt servicer profits. Servicers benefit financially from treating homeowners like garbage, and after a while, their executives probably think they can treat investors and regulators the same way, too.</span></p>
<p><span style="line-height: 1.538em;">As New York Superintendent of Financial Services Benjamin Lawsky </span><a href="http://www.dfs.ny.gov/about/press2014/pr1402121.htm" style="line-height: 1.538em;">said</a><span style="line-height: 1.538em;"> in a recent speech, “Rather than solely treating the symptoms of these problems through after-the-fact fines and enforcement actions—we also need to ask ourselves some deeper questions … how do we address the underlying problem itself?”</span></p>
<p><span style="line-height: 1.538em;">Appropriate regulation, argues financial writer </span><a href="http://baselinescenario.com/2014/02/14/the-social-value-of-finance/?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29" style="line-height: 1.538em;">James Kwak</a><span style="line-height: 1.538em;">, must allow for the consideration of whether innovations in financial services—like the mass transfer of MSRs to non-bank firms—have any social value. It’s beyond clear that mortgage servicers like Ocwen have none; they exist purely to extract money from customers. That conclusion should lead regulators beyond technocratic tinkering and toward a complete overhaul of the industry.</span></p>
</div></div></div>Wed, 26 Feb 2014 13:25:04 +0000219828 at http://prospect.orgDavid DayenThe Ink-Stained Wretches of Wall Streethttp://prospect.org/article/ink-stained-wretches-wall-street
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span class="dropcap">L</span>ast year, upon the 10<sup>th</sup> anniversary of the start of the war in Iraq, newspapers and magazines filled with soul-searching essays from journalists rethinking their advocacy of the invasion, documenting lessons learned and errors made. But a few months later, on the 5<sup>th</sup> anniversary of the fall of Lehman Brothers, the unofficial beginning of the financial crisis, virtually nobody wrestled with their failure to anticipate the Wall Street wrecking ball. Indeed, to date, no major news organization has apologized for missing the biggest economic story of the decade, and most business journalists defend their profession, arguing that they sounded the alarm about financial industry greed and the makings of a catastrophe. “The government, the financial industry and the American consumer—if they had only paid attention—would have gotten ample warning about the crisis from us,” said Diana Henriques of <em>The New York Times</em> in 2008. Neither she nor her colleagues have really looked back since.</p>
<p><span style="line-height: 1.538em;">As Dean Starkman, editor at the </span><em style="line-height: 1.538em;">Columbia Journalism Review</em><span style="line-height: 1.538em;">, writes in </span><em style="line-height: 1.538em;">The Watchdog that Didn’t Bark</em><span style="line-height: 1.538em;">, the media has investigated practically everyone involved in the financial crisis but themselves. It’s a critical omission, because journalism, when done right, can raise awareness of imminent failure or systemic abuse, and spur policymakers to reform. This was perhaps most apparent during the golden age of muckraking, an age Starkman reflects upon in his book, which attempts to place the modern business press in the context of 100 years of what he calls “accountability journalism.”</span></p>
<p><span style="line-height: 1.538em;">Sadly, this only magnifies how the business media habitually falls short when it counts most. The 19</span><sup>th</sup><span style="line-height: 1.538em;"> century financial press outright ignored the routine panics of its era; the </span><em style="line-height: 1.538em;">Wall Street Journal</em><span style="line-height: 1.538em;"> was caught flatfooted by the 1929 crash (a March 1928 editorial defended the rise of margin loans to retail stock buyers, a clear pyramid scheme, by arguing “the pyramid is the most stable form of all building with the broadest possible base”); the big papers dismissed the Savings &amp; Loan crisis of the 1980s; CNBC was blindsided by the accounting fraud of the Enron era; and so on. The particular style of journalism practiced on the business pages “is condemned to be forever taken by surprise by events,” to borrow Starkman’s phrase.</span></p>
<p><span style="line-height: 1.538em;">Given all this, it’s hard to make a case for any particular circumstances that caused the blind spot during the most recent crisis, when that appears to be a permanent condition. Nevertheless, Starkman, a longtime </span><em style="line-height: 1.538em;">Wall Street Journal</em><span style="line-height: 1.538em;"> reporter, armed with a wealth of historical knowledge and even </span><a href="http://www.cjr.org/the_audit/the_list.php" style="line-height: 1.538em;">hard data</a><span style="line-height: 1.538em;"> on seven-years worth of financial media stories in the run-up to the meltdown, gives it a try. He highlights three contributing factors: the CNBC-ization of the media, the financial distress in journalism around this time, and extreme deregulation robbing the press of a partner in government.</span></p>
<p><span style="line-height: 1.538em;">Of these three, the first holds the most water. Starkman is at his best when connecting changes in society to how they get reflected in the media. The rise of the 401(k) retirement plan gave many ordinary Americans a stake in the stock market, and business media ran with that by focusing their resources on granular details of individual companies and their market performance. In a sense, Starkman writes, CNBC, which took off in the late 1980s around the time of the rise to prominence of the 401(k), represents a return to the origins of business news, designed entirely for investors, with messenger boys delivering handbills directly to the trading floor. Of course, an investor focus would have been a good idea during the financial crisis, since so many of them got ripped off buying mortgage-backed securities that the issuers knew to be backed by garbage loans. The business press made a show of looking out for investors and “democratizing the news,” when in reality it set them up to be slaughtered by the big money boys on Wall Street because it never reported what lurked beneath the stock numbers, just on what CEOs and market analysts would tell them.</span></p>
<p><span style="line-height: 1.538em;">The transition from accountability journalism to access journalism defined news as whatever scrap of information official sources decided to supply. Reporting that way treats the stock market as a scoreboard and news as a tipsheet and it will never capture the true state of financial industry machinations and what they mean for the public. Instead of consistent investigations of fraudulent activities driving the housing bubble, we got celebrity-style executive-suite profiles (Starkman finds half a dozen bubble-era pieces on Lehman Brothers at different outlets that read like early drafts of one another). These profiles were “carefully negotiated,” Starkman notes, hinting at the corruption and self-censorship of the financial media, who had to keep their stories within certain boundaries to stay in the good graces of their sources, whom they relied upon for more access.</span></p>
<p><span style="line-height: 1.538em;">At other points, however, Starkman undercuts his own argument. He laments deregulation as eliminating some of the raw material investigative reporters use for stories, but acknowledges that “regulatory retreat only increases the responsibilities of the press.” He decries a lack of resources that squeezed out costly investigations (headcounts at papers like the </span><em style="line-height: 1.538em;">Washington Post</em><span style="line-height: 1.538em;"> and </span><em style="line-height: 1.538em;">Los Angeles Times</em><span style="line-height: 1.538em;"> dropped 50 percent in the 2000s), as well as the “Hamster Wheel” pace of newsgathering that rewards scoops instead of wide-ranging probes. But he also highlights a handful of reporters at tiny outlets who nailed key drivers of the crisis.</span></p>
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<p><span style="line-height: 1.538em;"><span class="dropcap">T</span>he hero of the book is Michael W. Hudson, who started investigating subprime lending in the early 1990s, for outlets like the </span><em style="line-height: 1.538em;">Roanoke</em><span style="line-height: 1.538em;"> </span><em style="line-height: 1.538em;">Times</em><span style="line-height: 1.538em;"> and the tiny </span><em style="line-height: 1.538em;">Southern Exposure</em><span style="line-height: 1.538em;"> magazine. Hudson, whose 2010 book </span><em style="line-height: 1.538em;">The Monster </em><span style="line-height: 1.538em;">presents the most comprehensive study of mortgage origination fraud, accomplished this feat through simple, shoe-leather reporting, talking to hundreds of low- and middle-income borrowers abused by high-pressure sales techniques that stuck them with loans they couldn’t possibly repay. Hudson connected these rapacious consumer finance companies with their sources of funding—the money-center banks on Wall Street who used these loans as the source material for just-as-fraudulent securities and derivatives they sold around the world, greatly magnifying the damage when everything crashed.</span></p>
<p><span style="line-height: 1.538em;">Hudson explained just one major example of the fraud that corroded the system (Starkman is a bit too focused on origination, Hudson’s beat, as the Rosetta stone of the crisis). But if nothing else, Hudson’s work proves that accountability reporting was possible even at cash-strapped journals in a deregulated environment. The indifference to the looming catastrophe, the inability to connect the dots and point fingers at those responsible represented a conscious choice by the topline business press. To underline this, Hudson spent a year and a half at the </span><em style="line-height: 1.538em;">Wall Street Journal</em><span style="line-height: 1.538em;">, right at the precipice of the crisis in 2006-07, and owing to office politics and associated factors well-detailed in Starkman’s book, produced few of the hard-hitting investigative pieces that defined his earlier career. It’s telling that Hudson’s direct supervisor at the </span><em style="line-height: 1.538em;">Journal</em><span style="line-height: 1.538em;"> was Jon Hilsenrath, perhaps the ultimate access reporter, known as practically an extra member of the Federal Reserve Board of Governors because of all the scoops he gets from the central bank.</span></p>
<p><span style="line-height: 1.538em;">Starkman hints at, but doesn’t engage with, a more fruitful area of inquiry; the mind-meld between reporters and the subjects they cover. It’s not just that incentives to gain access confound tough questioning of the industry; it’s that journalists see industry titans as social peers, despite the extreme disparity in wealth between a CEO and a beat reporter. Starkman acidly notes Andrew Ross Sorkin’s book party for his financial crisis narrative </span><em style="line-height: 1.538em;">Too Big to Fail</em><span style="line-height: 1.538em;"> was attended by practically every big bank CEO in the country. “I am tremendously grateful that they came out to support me,” Sorkin later says.</span></p>
<p><span style="line-height: 1.538em;">Those with specialized knowledge of financial markets invariably take on the perspective of Wall Street, viewing events through that narrow lens rather than with the broader public interest in mind. The book even furnishes a small example, detailing how in the 1990s, “predatory lending” was replaced in news stories by “subprime lending.” Predatory focuses on the conduct of the lender; subprime on the borrower. That softened the industry’s responsibility to deal in good faith. And when articles described such lending as “risky,” readers were cued to attribute that to the shakiness of the borrowers rather than the impropriety of the lenders.</span></p>
<p><span style="line-height: 1.538em;">This has always been the case; </span><em style="line-height: 1.538em;">The Watchdog that Didn’t Bark</em><span style="line-height: 1.538em;"> is peppered with historical examples of newspapermen bought by railroad and oil barons, reporters who received so many insider-trading tips they never collected their salary, and publishers with sympathies toward the preservation of the status quo.</span></p>
<p>The book might have benefited from some modern-day investigation into these practices; in other words, a story about the disappearance of watchdog journalism could have been helped by more watchdog journalism. But while pay-to-play exists—The <em>New York Times’</em> Dealbook and <em>Politico</em>’s Morning Money proudly display mega-bank advertising atop their pages—I suspect the myopic viewpoint of the business press is more tribal at this point. Gillian Tett, another hero of the book, describes it as “social silences,” a combination of ideology and groupthink that creates unspoken barriers for what can and cannot get coverage. Only outsiders to this culture of conformity can shine a true spotlight on any misconduct, a truism that hasn’t changed for a century (muckrakers like Ida Tarbell and Lincoln Steffens had to ply their trade in <em>McClure’s</em>, a general-interest monthly, not the business press).</p>
<p><span style="line-height: 1.538em;">It’s for this reason that Starkman disappoints when talking about online journalism. While he praises blogs like Naked Capitalism and the reporting at places like the </span><em style="line-height: 1.538em;">Huffington Post</em><span style="line-height: 1.538em;">, he believes such outlets have not filled the gap created by mass layoffs at the major dailies. In fact, Starkman mostly views digital media as a tool for corporate raiders to downsize traditional outlets, and he does not believe the business models of independent digital media support investigative journalism.</span></p>
<p><span style="line-height: 1.538em;">This ignores a fairly rich body of work, including reporting on the financial crisis and its aftermath, that came directly from the online world. For example, those individuals who broke the story of foreclosure fraud—the mass use of forged and fabricated documents to rush homeowners through the eviction process—did not work at traditional media outlets but were foreclosure victims, who uncovered discrepancies with their own documents and started their own websites, like </span><a href="http://www.foreclosurehamlet.org" style="line-height: 1.538em;">Foreclosure Hamlet</a><span style="line-height: 1.538em;"> and </span><a href="http://4closurefraud.org" style="line-height: 1.538em;">4closurefraud.org</a><span style="line-height: 1.538em;">, to get the word out when the media wouldn’t return their calls. In another era, these people would be either investigative sources or invisible, depending on the discretion of the media, but Internet publishing tools allowed them to tell their story anyway.</span></p>
<p><span style="line-height: 1.538em;">While the Internet “presents severe structural barriers to accountability reporting,” as Starkman writes, it also presents potential breakthroughs. Instead of long-form journalism that bundles months of reporting into one shot, there’s value in incremental, iterative reporting that releases each detail as it’s gathered, breaks down complex material into digestible chunks and furthers the narrative for months, even years. This is the tradition I come out of, and I think it does an able job, even if it’s not the Great Story, which Starkman holds up as the epitome of investigative journalism. There’s nothing inherent in word count that confers superiority.</span></p>
<p><span style="line-height: 1.538em;">If we want to know what happened in the aftermath of a crash, the elites of the media universe can perform that task well. But if we’re going to catch the next instance of financial malfeasance in real time, the warning may come from someone sitting at their laptop. Starkman makes the argument that people rely on traditional media, and he’s right. But his entire book identifies the dangers of that reliance.</span></p>
</div></div></div>Tue, 11 Feb 2014 13:48:06 +0000219709 at http://prospect.orgDavid DayenThe Government Guide to Screwing Poor Homeowners http://prospect.org/article/government-guide-screwing-poor-homeowners
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<p><span class="dropcap">T</span>he December 28<sup>th</sup> expiration of extended unemployment benefits, which cut off payments to 1.3 million recipients—and will cut off <a href="http://www.offthechartsblog.org/mapping-the-impact-of-letting-emergency-jobless-benefits-expire/">3.6 million more</a> over the next year—has dealt a painful body blow to the most vulnerable members of our society. Rolling back unemployment insurance to a maximum of 26 weeks when the <a href="http://bls.gov/news.release/empsit.t12.htm">average duration of unemployment</a> is still 36 weeks puts millions of families’ lives in jeopardy. </p>
<p><span style="line-height: 1.538em;">Another recently expired provision could cause comparable damage to the same population, but it has yet to trigger similarly urgent attention from lawmakers. The end of the Mortgage Forgiveness Debt Relief Act, which lapsed December 31, means that any type of debt forgiveness on a mortgage will result in a giant tax bill—one that a stressed homeowner cannot usually afford. Even homeowners entitled to compensation for past abuse by the mortgage-lending industry would be subject to unfavorable tax treatment. This will lead to more economically debilitating foreclosures and weaken the housing market. Despite bipartisan support for an extension, it's anybody's guess whether Congress will get around to helping out struggling homeowners.</span></p>
<p><span style="line-height: 1.538em;">The Mortgage Forgiveness Debt Relief Act dates back to 2007. When the housing bubble collapsed, millions of homeowners fell into a Great Recession-induced crisis of lost wages and plummeting property values. Principal reductions—cuts to the unpaid balance of a home loan—have been </span><a href="http://www.housingwire.com/articles/28116-sp-principal-reductions-perform-better-than-rate-decreases" style="line-height: 1.538em;">proven time and again</a><span style="line-height: 1.538em;"> to be the most effective method for a homeowner to avoid foreclosure. But there was a problem: For tax purposes, the IRS treats forms of debt relief like principal reduction as gross income. So a $100,000 principal reduction for a family making $50,000 a year would force them to pay taxes as if they earned $150,000, saddling them with a federal tax bill (according to </span><a href="http://www.moneychimp.com/features/tax_calculator.htm" style="line-height: 1.538em;">this calculator</a><span style="line-height: 1.538em;">) of $32,493, or over two-thirds of their annual income. </span><span style="line-height: 1.538em;">Struggling homeowners </span><span style="line-height: 1.538em;">don’t</span><span style="line-height: 1.538em;"> typically have bags of cash lying around to pay off tax bills. </span></p>
<p><span style="line-height: 1.538em;">In 2007, Congress passed the Mortgage Forgiveness Debt Relief Act, exempting mortgage debt forgiveness from taxation. The law was extended twice as the foreclosure crisis lingered. It made it into the </span><a href="http://www.chicagonow.com/getting-real/2013/01/mortgage-forgiveness-debt-relief-act-saved-in-fiscal-cliff-deal/" style="line-height: 1.538em;">2012 “fiscal cliff” deal</a><span style="line-height: 1.538em;"> at the last minute, extending relief through the end of 2013. But it </span><a href="http://www.latimes.com/business/la-fi-mortgage-tax-break-20140101,0,6082253.story#axzz2pNu2QHVz" style="line-height: 1.538em;">expired last week</a><span style="line-height: 1.538em;">, putting homeowners on the hook.</span></p>
<p><span style="line-height: 1.538em;">The need for mortgage relief is pressing. The most recent statistics show </span><a href="http://www.calculatedriskblog.com/2013/12/lps-mortgage-delinquency-rate-increased.html" style="line-height: 1.538em;">nearly 4.5 million homes</a><span style="line-height: 1.538em;"> are in some stage of delinquency. And </span><a href="http://www.corelogic.com/about-us/news/corelogic-reports-791,000-more-residential-properties-return-to-positive-equity-in-third-quarter-of-2013.aspx" style="line-height: 1.538em;">more than 6 million homes</a><span style="line-height: 1.538em;"> are “underwater,” with the homeowner owing more than the home is worth. These homes are at risk of foreclosure, but many lower-income borrowers who can’t afford the tax bill will have to turn down mortgage help. Housing advocates were hopeful that the </span><a href="http://www.politico.com/story/2013/12/mel-watt-fannie-mae-freddie-mac-regulator-100970.html" style="line-height: 1.538em;">confirmation of Mel Watt</a><span style="line-height: 1.538em;"> to run the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, would lead to those agencies (which own or guarantee 90 percent of all new mortgages) finally offering principal reductions to prevent foreclosures. But the tax situation makes Watt’s confirmation irrelevant on this point.</span></p>
<p><span style="line-height: 1.538em;">The expiration of unemployment insurance exacerbates this problem, as long-term unemployed homeowners no longer have that lifeline. A federally funded program called the </span><a href="http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/hhf/Pages/default.aspx" style="line-height: 1.538em;">Hardest Hit Fund</a><span style="line-height: 1.538em;"> helps unemployed homeowners in 18 states with mortgage assistance. Each state program is different, but most involve some form of debt forgiveness. So unemployed homeowners get a double whammy: They lose their benefits at 26 weeks, and the program designed to help them keep their home while they seek work will encumber them with significant tax liability.</span></p>
<p><span style="line-height: 1.538em;">Perhaps worst of all, federal and state regulators recently secured two financial fraud settlements—with </span><a href="http://www.newrepublic.com/article/115382/jpmorgans-mortgage-penalty-could-be-huge-blow-homeowners" style="line-height: 1.538em;">JPMorgan Chase</a><span style="line-height: 1.538em;"> and the mortgage servicer </span><a href="http://www.newrepublic.com/article/116010/ocwen-mortgage-fraud-settlement-servicer-fined-homeowner-abuse" style="line-height: 1.538em;">Ocwen</a><span style="line-height: 1.538em;">—that required those firms to reduce mortgage principal by at least $3.5 billion. The principal reductions for tens of thousands of homeowners will now be taxable. So a benefit to homeowners—compensation for being abused by financial institutions—will end up actively harming them. In JPMorgan Chase’s case, the bank vowed to offer principal write-downs to hard-hit areas like </span><a href="http://www.theatlanticwire.com/politics/2013/10/part-jpmorgan-settlement-will-help-detroit-homeowners/70804/" style="line-height: 1.538em;">Detroit</a><span style="line-height: 1.538em;">. As if As if Detroiters didn’t have enough problems, now they must beware a bank bearing gifts that will penalize them.</span></p>
<p><span style="line-height: 1.538em;">Seemingly oblivious to the damage this will cause, federal officials have cited both the JPMorgan and Ocwen settlements as a </span><a href="http://www.washingtonpost.com/business/economy/justice-to-use-jpmorgan-deal-as-the-template-for-future-settlements/2013/10/21/32268d5a-3a55-11e3-b6a9-da62c264f40e_story.html?wprss=rss_homepage" style="line-height: 1.538em;">template</a><span style="line-height: 1.538em;"> for future enforcement actions. “This has the effect of pulling people up with one hand, and hitting them in the face and knocking them over the cliff with the other,” said </span><a href="http://www.salon.com/2012/08/01/underwater_homeowners_face_a_tax_time_bomb/" style="line-height: 1.538em;">Senator Jeff Merkley</a><span style="line-height: 1.538em;"> recently.</span></p>
<p><span style="line-height: 1.538em;">The tax exemption also covered most short sales, in which banks agree to allow a property to sell for less than the value of their mortgage and forgive the balance. </span><a href="http://ecreditdaily.com/2014/01/short-sales-taxes-lawmakers-revive-mortgage-debt-relief-act/" style="line-height: 1.538em;">Short sales surged</a><span style="line-height: 1.538em;"> at the end of the year, as realtors strained to get them in before the tax break expired. We can now expect short sales to dramatically fall because it no longer makes economic sense for individuals trying to sell their underwater home to take on the big tax burden. This has implications for the entire housing market; it means reduced inventory for sale and fewer affordable homes available for buyers. And for those locked out of short sales or principal-reduction options, it means more foreclosures, which devastate communities and reduce property values.</span></p>
<p>There is a <a href="http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-">hardship exemption</a> to the taxation of mortgage debt cancellation, but the individual has to prove that their total debts exceed the fair market value of their assets. This insolvency claim requires special reporting and documentation. Low- and moderate-income homeowners don’t necessarily have the tax-planning experience or resources to deal with this easily.</p>
<p>The good news is that there’s time for a deal. Tax bills for 2014 don't come due until next April. And there’s actually a potent coalition in place for this fight. Bipartisan bills in the House and Senate would extend the law for two more years. The House bill has 52 co-sponsors: 29 Democrats and an impressive 23 Republicans. Forty two state attorneys general from both parties (including conservative bastions like Idaho, Kansas, and Mississippi) have <a href="http://www.mass.gov/ago/docs/press/2013/mortgage-tax-relief.pdf">urged Congress</a> for an extension, arguing that “this relief is crucial to both the homeowners struggling to regain their financial footing and to the battered housing market whose recovery is slow and still uncertain.” Because of the impact on housing, both consumer groups like the National Consumer Law Center and industry trade groups like the <a href="http://thehill.com/blogs/on-the-money/housing/191591-struggling-homeowners-staring-down-a-hefty-tax-hike">National Association of Realtors</a> and the <a href="http://www.marketplace.org/topics/wealth-poverty/tax-relief-may-expire-underwater-homeowners">Mortgage Bankers Association</a> support the extension as well.</p>
<p>The problem, congressional aides say, lies in finding a legislative vehicle for passage. Last year, the mortgage debt relief measure was lumped in with 55 other tax-related provisions known on Capitol Hill as “<a href="http://www.fas.org/sgp/crs/misc/R43124.pdf">tax extenders</a>.” Those expiring provisions <a href="http://www.washingtonpost.com/blogs/wonkblog/post/from-nascar-to-wind-power-congress-just-let-55-tax-breaks-expire/2014/01/02/961837a4-73d1-11e3-bc6b-712d770c3715_blog.html?wprss=rss_ezra-klein">did not pass last year</a>, and aides doubt an extender bill could <a href="http://taxvox.taxpolicycenter.org/2013/12/10/whither-the-tax-extenders/?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+taxpolicycenter%2Fblogfeed+%28TaxVox%3A+the+Tax+Policy+Center+blog%29">pass on its own</a> in 2014, especially because of the fiscal cost and the need for offsets. The annual patch to the alternative minimum tax, which was previously used to pass such legislation, was fixed permanently in 2012, leaving less leverage for the remaining tax extenders. The <a href="http://www.politico.com/story/2013/12/max-baucus-ambassador-china-101300.html">imminent departure of Max Baucus</a>, chair of the lead tax-writing committee in the Senate, who has been nominated to serve as ambassador to China, throws the issue into further disarray.</p>
<p>Aides argue that the tax extenders, and therefore mortgage-forgiveness debt relief, could get folded into the upcoming farm bill, or into legislation permanently fixing the payment rate for doctors serving Medicare and Medicaid patients. But with the budget off the table for two years, and few must-pass pieces of legislation on the horizon, the possibility exists for tax extenders to get orphaned despite bipartisan support.</p>
<p>If the effort falls flat, struggling homeowners will face the latest in a series of misfortunes, first from their lenders and now from the government. Homeowners are hurting, and they shouldn’t have to decide between foreclosure and a balloon payment to the IRS.</p>
</div></div></div>Wed, 08 Jan 2014 13:57:29 +0000219493 at http://prospect.orgDavid DayenRobbing Illinois's Public Employeeshttp://prospect.org/article/robbing-illinoiss-public-employees
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span class="dropcap">I</span>n the span of a few hours on December 3, two Midwestern states changed America’s relationship to its public employees, perhaps irrevocably. If courts approve plans for bankruptcy in Detroit and a new law in Illinois, retirees who worked their careers as sanitation engineers and teachers, firefighters and police officers, public defenders and city clerks, under a promise of pension benefits protected by state constitutions, will not receive their promised share. “This is a bipartisan collection of politicians who essentially don’t respect democracy,” says Steve Kreisberg, director of Research and Collective Bargaining for the public-employee union AFSCME. “They authorized a violation of their own state constitutions.”</p>
<p><span style="line-height: 1.538em;">The implications for the future of public pensions are grave. Michigan and Illinois are two of just seven states with clauses in their state constitutions prohibiting cuts to public pensions. If they can nevertheless slash benefits, cities, and states with less stringent laws will leap at the chance to shed their obligations to retirees. And no collective bargaining agreement could in good faith agree to defer compensation into retirement if even constitutional guarantees on that money can be ignored. Pensions would become a thing of the past in the public sector, just as they have become in the private sector, where retirement security stands on shaky ground. The slow disappearance of public pension funds, </span><a href="http://www.bloomberg.com/news/2013-08-07/insurers-get-shot-at-3-trillion-in-hatch-s-pension-plan.html" style="line-height: 1.538em;">$3 trillion</a><span style="line-height: 1.538em;"> pools for capital investments, would have much broader negative consequences for our economy.</span></p>
<p><span style="line-height: 1.538em;">The circumstances in Detroit and Illinois are different, but for the affected workers, the outcome is the same. In Detroit, the decline of manufacturing, a population exodus, and mismanagement by city leaders led to $18 billion in longterm debt (a number which has been </span><a href="http://www.demos.org/publication/detroit-bankruptcy" style="line-height: 1.538em;">disputed as inflated</a><span style="line-height: 1.538em;">, I should add). Kevyn Orr, the emergency financial manager empowered to make fiscal changes without input from local elected officials, sought bankruptcy in federal court, in part to get around the Michigan constitution, which expressly prohibits cuts to pension benefits for retirees. Last Tuesday, Judge Steven Rhodes </span><a href="http://live.detroitnews.com/2013/12/03/eligibility-day/" style="line-height: 1.538em;">ruled</a><span style="line-height: 1.538em;"> that federal bankruptcy law pre-empts any extraordinary state protections on pensions. The judge added, “This court will not lightly or casually exercise power … to impair pensions,” but the ruling virtually guarantees cuts for 23,000 retirees and 9,000 current workers, who will have to </span><a href="http://thinkprogress.org/economy/2013/08/02/2408081/detroit-pension-explainer/" style="line-height: 1.538em;">get in line with other creditors</a><span style="line-height: 1.538em;"> for a partial payout from the city. With the average pension in Detroit a paltry </span><a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/19/detroits-pension-problems-in-one-chart/" style="line-height: 1.538em;">$19,000 a year</a><span style="line-height: 1.538em;">, this will likely throw retirees into poverty. State Republicans </span><a href="http://www.freep.com/article/20130724/COL06/307240120/" style="line-height: 1.538em;">approved $450 million</a><span style="line-height: 1.538em;"> in public funds to build a new hockey arena in Detroit at the same time. Public workers and retirees plan to appeal the bankruptcy court ruling.</span></p>
<p><span style="line-height: 1.538em;">In Illinois, lawmakers chronically underpaid contributions to pension funds for decades, making a </span><a href="http://www.cepr.net/index.php/blogs/beat-the-press/missing-background-on-chicagos-pensions" style="line-height: 1.538em;">false assumption</a><span style="line-height: 1.538em;"> that late-1990s stock run-ups that boosted the funds would perpetuate. With a large projected deficit, workers this year negotiated a pension reform bill that passed the State senate twice. But each time, Democratic House Speaker Mike Madigan refused to bring it up for a vote. “We had a solution that was fairer to workers,” says Roberta Lynch of AFSCME Council 31 in Illinois. “There’s no reason it couldn’t have passed, except the Democrats wanted to take more money out of working people's pockets.”</span></p>
<p><span style="line-height: 1.538em;">The </span><a href="http://www.nytimes.com/2013/12/04/us/politics/illinois-legislature-approves-benefit-cuts-in-troubled-pension-system.html?partner=rss&amp;emc=rss&amp;_r=0" style="line-height: 1.538em;">final deal</a><span style="line-height: 1.538em;">, passed by a Democratic legislature and </span><a href="http://www.chicagotribune.com/news/politics/clout/chi-illinois-pension-bill-signing-20131205,0,6943365.story" style="line-height: 1.538em;">signed into law</a><span style="line-height: 1.538em;"> by Democratic Governor Pat Quinn, caps benefits, cuts cost-of-living increases for retirees, raises the retirement age by up to five years for younger workers, and offers an optional 401(k) plan to lure workers to leave the pension system. Workers will contribute 1 percent less to their retirement funds under the plan, in an attempt to compensate for the $100 billion in givebacks. But a retiree can expect to </span><a href="http://www.weareoneillinois.org/news/oppose-the-leaders-extreme-pension-scheme" style="line-height: 1.538em;">lose thousands of dollars a year</a><span style="line-height: 1.538em;"> under the new law, and workers would be barred from changing the plan through collective bargaining in the future. The average Illinois public employee pension is $32,000 a year, but 80 percent of state workers affected do not participate in Social Security, as Illinois is </span><a href="http://www.nea.org/home/16819.htm" style="line-height: 1.538em;">one of 15 states</a><span style="line-height: 1.538em;"> which covers their employees instead through their public pension program. So these pensions represent the sum total of Illinois public employees’ retirement income. “When you cut someone’s wages, at least that person can say, I’m not working for you,” says Ross Eisenbrey, vice president of the Economic Policy Institute. “By cutting retiree pensions, this is literally reaching into their bank account and stealing from them after the fact.”</span></p>
<p><span style="line-height: 1.538em;">Like Michigan, Illinois has a constitutional restriction on impairing pensions for retirees. But unlike Detroit, Illinois was not forced into pension restructuring due to bankruptcy. In fact, Illinois is a wealthy state, with the fifth-largest GDP in the nation, a low tax burden that includes a flat 5 percent income tax (residents with poverty wages pay the same percentage as millionaires), and a history of corporate tax giveaways. On the same day that pensions were cut, the state Senate also approved a </span><a href="http://quincyjournal.com/business-beat/2013/12/04/illinois-senate-advances-adm-tax-break-bill,-house-fails-to-act/" style="line-height: 1.538em;">multimillion-dollar tax break</a><span style="line-height: 1.538em;"> for the agribusiness giant Archer Daniels Midland. “They didn't even have the respect to wait a day,” says AFSCME’s Steve Kreisberg. The union is part of a coalition </span><a href="http://news.yahoo.com/illinois-pension-fight-likely-shifting-courts-064457497--finance.html" style="line-height: 1.538em;">planning to sue</a><span style="line-height: 1.538em;"> over what they consider an unconstitutional theft.</span></p>
<p><span style="line-height: 1.538em;">Detroit and Illinois public workers aren’t the only ones facing an assault on their pensions. Cities across the country are using pension crises, or at least the perception of them, to </span><a href="http://ourfuture.org/plotagainstpensions" style="line-height: 1.538em;">impose cuts on workers</a><span style="line-height: 1.538em;"> who paid into their pensions dutifully throughout their careers. A conservative coalition called the State Policy Network, according to leaked documents revealed by </span><em style="line-height: 1.538em;"><a href="http://www.theguardian.com/world/2013/dec/05/state-conservative-groups-assault-education-health-tax">The Guardian</a></em><span style="line-height: 1.538em;">, is planning campaigns to cut or eliminate public pensions in several states. The current </span><a href="http://www.politico.com/story/2013/12/paul-ryan-patty-murray-budget-deal-100559_Page2.html" style="line-height: 1.538em;">federal budget deal</a><span style="line-height: 1.538em;"> being negotiated may include cuts to federal employee pensions. As Georgetown Law professor Adam Levitin </span><a href="http://www.creditslips.org/creditslips/2013/12/detroit-eligibility-and-pensions.html?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+creditslips%2Ffeed+%28Credit+Slips%29" style="line-height: 1.538em;">points out</a><span style="line-height: 1.538em;">, states and cities are watching Detroit and Illinois closely. “If Detroit can shed its pension obligations in bankruptcy, then bankruptcy enables municipalities to slough off decades of promises made to their employees,” he wrote. Similarly, if Illinois can ignore constitutional protections on pensions, any state could do the same.</span></p>
<p><span style="line-height: 1.538em;">Given what happened in Detroit and Illinois, public employees have no reason to believe that any pension they obtain through collective bargaining will actually be there for them in retirement. “The level of cynicism and distrust that every public employee in this state feels right now is massive,” says AFSCME Illinois’s Roberta Lynch. Future public employee contracts will likely feature nominal wage hikes, in exchange for significantly lower future retirement security, paradoxically hurting local economies. “Cities cannot strengthen local economies by cutting the buying power of retirees,” says Jordan Marks, executive director of the National Public Pension Coalition.</span></p>
<p><span style="line-height: 1.538em;">The biggest consequence of disappearing pensions would be similar to what we’ve seen in the private sector, a conversion into </span><a href="http://members.jacksonville.com/news/metro/2013-12-02/story/jacksonville-pension-reform-will-consider-tax-rate-increase-and-higher" style="line-height: 1.538em;">defined-contribution, 401(k)-style plans</a><span style="line-height: 1.538em;">. These plans impose 46 percent higher costs than pension plans, according to the </span><a href="http://www.nirsonline.org/index.php?option=com_content&amp;task=view&amp;id=121&amp;Itemid=48" style="line-height: 1.538em;">National Institute for Retirement Security</a><span style="line-height: 1.538em;">, with much of that money landing in the hands of Wall Street investment managers. And 401(k)s have contributed to a looming retirement crisis for workers, who are </span><a href="http://www.washingtonpost.com/business/economy/many-americans-accumulating-debt-faster-than-theyre-saving-for-retirement/2013/10/23/b7a9c85e-3b3e-11e3-b6a9-da62c264f40e_story.html" style="line-height: 1.538em;">accruing debt faster</a><span style="line-height: 1.538em;"> than they generate savings, according to a report from the research firm Hello Wallet.</span></p>
<p><span style="line-height: 1.538em;">Not only would public employees suffer from a shift from pensions to 401(k) plans, so would the entire economy. Public pension funds, which distribute benefits to workers, hold $3 trillion in wealth, and they invest that money in everything from mortgages to infrastructure. Because public pension funds have a long time horizon, they can invest in long-term projects in ways other investors cannot. Shutting them down would radically transform what gets investment capital in America, and over time, funding would shift away from safer, long-term projects and into shorter-term investments. This increased risk through chasing short-term profits was a major cause of the financial crisis.</span></p>
<p><span style="line-height: 1.538em;">Because so few private-sector workers receive pensions anymore, opponents of public pensions try to divide the population, pitting taxpayers without retirement security against public workers with pensions. Despite this tactic, recent polling in </span><a href="http://www.freep.com/article/20130922/NEWS15/309220066/" style="line-height: 1.538em;">Detroit</a><span style="line-height: 1.538em;"> and </span><a href="http://www.weareoneillinois.org/documents/pollmemoFeb2013.pdf" style="line-height: 1.538em;">Illinois</a><span style="line-height: 1.538em;"> shows that people do not want public employees to lose their pensions, especially when they learn that they are modest benefits that workers spent their lives earning. But public opinion has not driven the political response. “There was incredible public resentment against AIG when they got those bonuses,” says Steve Kreisberg of AFSCME. “But they got their money, because of the sanctity of contracts, we were told. Where’s Larry Summers now talking about these pensions? The broader issue is that it depends on who the contract is with as to whether they can be broken.”</span></p>
<p><span style="line-height: 1.538em;">Cutting the safety net for public workers, especially those without Social Security as a fallback, will likely mean higher costs elsewhere in the form of food stamps and housing vouchers. But more than that, this represents another in a string of broken promises to middle-class workers. “To me this is a sign of moral decay,” concludes the Economic Policy Institute’s Ross Eisenbrey. “That people can accept the work of tens of thousands, promise them a certain wage, and then renege on it? I find that appalling.” As for the looming court cases on these proposed cuts, Eisenbrey quips, “Hopefully the judges recognize they have a public pension too!”</span></p>
</div></div></div>Mon, 09 Dec 2013 13:38:43 +0000219383 at http://prospect.orgDavid DayenThe Democrats' Original Food-Stamp Sinhttp://prospect.org/article/democrats-original-food-stamp-sin
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>“Today, 47 million Americans struggling to put food on the table will have to make do with less,” began the emailed press release from House Democratic Leader Nancy Pelosi’s office. The statement lamented the $5 billion cut to food-stamp benefits that took effect November 1, rolling back a 13.6 percent expansion to the program that was part of the 2009 stimulus package. The cuts leave “participants with just $1.40 to spend per meal,” the press release continued, adding that House Republicans want to subject food stamps to more cuts in the future.</p>
<p><span style="line-height: 1.538em;">But before Democrats completely rewrite the history of this body blow to the poor, a review of the facts would be in order. The seeds of this current food-stamp cut were sown by multiple deals made when Democrats held both chambers of Congress and the White House. They used money from the food-stamp program to pay for other priorities like education, health care and the school lunch program, all the while assuring that they would eventually restore the cuts. Those promises were broken, the crocodile tears from the left side of the aisle mask the bipartisan nature of slashes to this essential program, which currently provides nutrition assistance for nearly one in six Americans. It’s a disappointing example of how Washington’s fascination with the deficit and inattention to the plight of the most vulnerable didn’t begin with the Tea Party.</span></p>
<p><span style="line-height: 1.538em;">Cast your mind back to those bygone days of 2010. The stimulus was chugging along, and the 13.6 percent increase in food-stamp benefits, officially known as SNAP (Supplemental Nutrition Assistance Program), was one of its most effective measures. Food stamps are among the </span><a href="http://www.cbpp.org/cms/?fa=view&amp;id=3239" style="line-height: 1.538em;">most effective ways</a><span style="line-height: 1.538em;"> to deliver direct assistance to people in need, and because it’s a benefit that involves consumer purchases, it props up the retail sector as well. Every dollar increase to SNAP generates around </span><a href="http://www.cbsnews.com/8301-505145_162-57609936/millions-on-food-stamps-facing-benefits-cuts/" style="line-height: 1.538em;">$1.70</a><span style="line-height: 1.538em;"> in economic activity, according to Moody’s Analytics.</span></p>
<p><span style="line-height: 1.538em;">The increased SNAP benefit was supposed to phase out gradually, by letting inflation catch up to the higher benefit level. Because of smaller-than-expected increases in food prices, the money allocated in 2009 would have lasted until at least 2016. But Democrats, in full control of the government, decided SNAP money could serve as a funding source to funnel to other needs. For example, the stimulus was too small to reverse the carnage caused by the Great Recession, especially in the states, where thousands of teachers were being fired, and Medicaid beneficiaries were losing their coverage. In 2010, Democrats had the idea for a $26 billion supplemental state fiscal-aid bill, to fill those education and health-care gaps.</span></p>
<p><span style="line-height: 1.538em;">Earlier that year, Democrats proudly wrote and passed a statutory “</span><a href="http://en.wikipedia.org/wiki/Statutory_Pay-As-You-Go_Act" style="line-height: 1.538em;">pay as you go” bill</a><span style="line-height: 1.538em;">, on a </span><a href="http://thehill.com/blogs/blog-briefing-room/homenews/60022-senate-passes-pay-go-rule-on-party-line-vote" style="line-height: 1.538em;">party-line vote</a><span style="line-height: 1.538em;">, forcing all new federal spending to be offset by reductions elsewhere in the budget. The state fiscal-aid bill would have to be paid for, and </span><a href="http://washingtonindependent.com/91851/obey-white-house-suggested-cutting-food-stamps-to-pay-for-edujobs-funding" style="line-height: 1.538em;">the Obama Administration</a><span style="line-height: 1.538em;"> immediately looked to SNAP as a cookie jar they could raid. According to then-House Appropriations Committee chair David Obey, “Their line of argument was, well, the cost of food relative to what we thought it would be has come down, so people on food stamps are getting a pretty good deal in comparison to what we thought they were going to get. Well isn’t that nice? Some poor bastard is going to get a break for a change.”</span></p>
<p><span style="line-height: 1.538em;">Liberal politicians and advocates reckoned that the state fiscal-aid package filled an immediate need, while the SNAP rollback wouldn’t take effect until years later, presumably when fewer people would need the assistance. In the end, Democrats used </span><a href="http://www.huffingtonpost.com/2010/08/04/state-aid-clears-senate-h_n_670440.html" style="line-height: 1.538em;">$11.9 billion</a><span style="line-height: 1.538em;"> originally intended for SNAP to fund the state fiscal-aid bill, accelerating the phase-out of the increased stimulus benefit to 2014. But everyone on the left insisted that they would push to restore those cuts before they took effect. Progressive allies like Chuck Lovelace, legislative director for AFSCME, the public-employees union, </span><a href="http://news.firedoglake.com/2010/07/30/labor-progressive-leaders-biting-bullet-on-food-stamp-cut-for-state-fiscal-aid/" style="line-height: 1.538em;">told me</a><span style="line-height: 1.538em;"> back then, “we intend to go back and work to restore that benefit at the appropriate time.” Liberal senators like Ron Wyden, the Oregon Democrat, </span><a href="http://www.huffingtonpost.com/2010/08/04/state-aid-clears-senate-h_n_670440.html" style="line-height: 1.538em;">agreed</a><span style="line-height: 1.538em;">, telling the </span><em style="line-height: 1.538em;">Huffington Post</em><span style="line-height: 1.538em;">, “we're going to be able to find a way to ensure that there's help for needy folks in terms of assistance with hunger.”</span></p>
<p>But instead of immediately working on restoring the funds, Democrats would raid SNAP again. First Lady Michelle Obama has made a priority of the child obesity epidemic, and she heavily promoted the <a href="http://en.wikipedia.org/wiki/Healthy,_Hunger-Free_Kids_Act_of_2010">Healthy, Hunger-Free Kids Act of 2010</a>. The bill, which reauthorized the child-nutrition program that delivers free school lunches to needy children, allocated $4.5 billion to implement new standards for healthier foods and to increase access to free school lunches. Because of the pay-as-you-go rule, this also required offsets. And SNAP proved an inviting target once again. In <a href="http://prescriptions.blogs.nytimes.com/2010/08/05/senate-passes-child-nutrition-act/">August 2010</a>, the Senate partially financed their version of the bill with a $2.2 billion cut to SNAP, leaving the increased benefits to phase out by October 2013. This was the equivalent of paying for more school lunches for poor children by taking away their future breakfasts and dinners.</p>
<p><span style="line-height: 1.538em;">Hunger advocates and many House Democrats </span><a href="http://news.firedoglake.com/2010/09/29/food-fight-house-resists-food-stamp-cuts-in-child-nutrition-bill/" style="line-height: 1.538em;">initially balked</a><span style="line-height: 1.538em;">. Over 100 liberal members </span><a href="http://www.nytimes.com/2010/09/24/us/24food.html?_r=0" style="line-height: 1.538em;">wrote a letter</a><span style="line-height: 1.538em;"> to Nancy Pelosi demanding no SNAP cuts in the child nutrition bill. Citing “</span><a href="http://www.politico.com/news/stories/0910/42800.html" style="line-height: 1.538em;">concerns about the deficit</a><span style="line-height: 1.538em;">,” then-Chief of Staff Rahm Emanuel, White House officials and the First Lady herself lobbied House progressives aggressively. And in the lame-duck session after the 2010 elections, the bill </span><a href="http://www.nytimes.com/2010/12/03/us/politics/03child.html" style="line-height: 1.538em;">finally passed</a><span style="line-height: 1.538em;">. Democrats waived their objections to the SNAP cuts after losing the House in the 2010 midterms. Time essentially ran out on the Democratic majority, and the choices were either the Senate bill—and its $2.2 billion cut to SNAP—or no overhaul of child nutrition standards. Democrats opted for the former, with </span><a href="http://www.opencongress.org/vote/2010/h/603" style="line-height: 1.538em;">all but four</a><span style="line-height: 1.538em;"> voting for final passage. Again, Democrats, right on up to </span><a href="http://www.nytimes.com/2010/12/03/us/politics/03child.html" style="line-height: 1.538em;">President Obama</a><span style="line-height: 1.538em;">, vowed to restore the SNAP cuts before they hit. But with Republicans taking over the House, these promises rang hollow.</span></p>
<p><span style="line-height: 1.538em;">The Democratic failure on food stamps had multiple culprits. Congress locked itself into a pay-as-you-go formula it could have waived by citing emergency measures, but never did. Fiscally conservative “Blue Dog” Democrats like Ben Nelson would never have voted for extra spending, and Harry Reid needed every Senate Democrat to pass most bills. Moreover, this fiscal conservatism in a time of crisis matched the President’s “pivot” to deficit reduction in 2010, which has done major damage to the economy; since that time, federal spending has </span><a href="http://news.firedoglake.com/2012/01/10/fiscal-policy-having-negative-impact-on-economic-growth/" style="line-height: 1.538em;">become a fiscal drag</a><span style="line-height: 1.538em;">, taking away from GDP instead of adding to it.</span></p>
<p><span style="line-height: 1.538em;">Using food stamps as a pay-for, instead of tax breaks for millionaires and oil companies, reveals much about the priorities of the Democratic Party. For example, the assumption made by the White House that the baseline SNAP benefit is adequate, and that recipients were getting too good a deal with the expansion, is borderline insulting and shows the lack of familiarity with the realities of poverty in America. The cuts that took effect November 1 equal the </span><a href="http://blog.metrotrends.org/2013/11/todays-snap-reduction-equivalent-weeks-meals-9-year-old/?utm_content=buffer00671&amp;utm_source=buffer&amp;utm_medium=twitter&amp;utm_campaign=Buffer" style="line-height: 1.538em;">reduction of a week’s meals</a><span style="line-height: 1.538em;"> for a 9 year-old child. Food banks around the country are now </span><a href="http://www.huffingtonpost.com/2013/11/01/food-stamp-cut_n_4191975.html" style="line-height: 1.538em;">bracing</a><span style="line-height: 1.538em;"> for increased demand.</span></p>
<p><span style="line-height: 1.538em;">Democrats also assumed that the economy would be back on its feet by the end of 2013, and that fewer people would be affected by the SNAP rollback. But they’ve consistently made this mistake of optimism throughout the recovery. Failing to have an emergency mindset around returning the nation to full employment, and expecting the economy to turn around by itself, drove decisions that have wounded the most vulnerable.</span></p>
<p><span style="line-height: 1.538em;">Liberals </span><a href="http://www.salon.com/2013/11/01/wal_mart_borders_on_the_ludicrous_rep_conyers_tells_salon/" style="line-height: 1.538em;">have introduced bills</a><span style="line-height: 1.538em;"> to reverse the cuts, but with the current leadership in the House, they’re a nonstarter. In fact, the choices on SNAP today </span><a href="http://www.nytimes.com/2013/11/01/us/as-cuts-to-food-stamps-take-effect-more-trims-to-benefits-are-expected.html?_r=1&amp;" style="line-height: 1.538em;">range</a><span style="line-height: 1.538em;"> from Republican demands to cut the program by $40 billion over the next decade to a Democratic counter-offer to only cut it by $4.5 billion. While these are small in relative terms—SNAP paid out $76 billion just in 2012—so many Americans rely on food stamps, and its benefits are so meager that any cuts will have an outsized effect.</span></p>
<p><span style="line-height: 1.538em;">We shouldn’t forget that the same Democrats sponsoring bills to reverse SNAP cuts voted for them in the first place. They made a series of choices while in total control of Washington, and those choices have had consequences. If the party had more respect for the struggles of the poor, rather than a deep attention to political positioning and the scourge of the deficit, this would have never happened.</span></p>
</div></div></div>Wed, 06 Nov 2013 13:39:43 +0000219132 at http://prospect.orgDavid DayenBig Bank Punishments Don't Fit Their Crimeshttp://prospect.org/article/big-bank-punishments-dont-fit-their-crimes
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>With the Justice Department desperate to rehabilitate its image as a diligent prosecutor of financial fraud, securing headlines along the lines of “the largest fine against a single company in history” is a lifeline. In a <a href="http://dealbook.nytimes.com/2013/10/19/jpmorgan-said-to-be-discussing-13-billion-settlement-over-mortgage-loans/?partner=rss&amp;emc=rss&amp;_r=0">tentative deal</a>, the Department would force JPMorgan Chase to pay a $9 billion fine and commit $4 billion to mortgage relief, to settle multiple investigations into their mortgage-backed securities business. The bank stands accused of knowingly selling investors mortgage bonds backed by loans that didn’t meet quality control standards outlined in its investment materials. JPMorgan Chase wants to “pay for peace” in this deal, ending all civil litigation around mortgage-backed securities by state and federal law enforcement, though at least one criminal case would remain open.</p>
<p><span style="line-height: 1.538em;">But for the Justice Department to truly start fresh, and fulfill their mission of stopping corporate fraud and preventing it from occurring again, they will have to compel JPMorgan to admit full liability for deliberately selling rotten mortgage securities. And here, federal agencies have revealed themselves as more interested in extracting public relations value by getting banks to admit something resembling wrongdoing, rather than forcing them to confess more widespread transgressions which would increase their legal exposure. Though agencies like the Securities and Exchange Commission (SEC) have announced “get-tough” procedures on extracting admissions of wrongdoings in financial fraud settlements, in practice they serve as nothing more than insincere apologies.</span></p>
<p>Even massive fines, like in the mortgage-backed securities case, are not sufficient as deterrents against illegal corporate behavior that harms the public. JPMorgan has dedicated reserves to pay such fines, and the cash essentially comes out of the pockets of shareholders in the form of lower dividends and a reduced stock price. While corporate executives invested in their own company have a lot to lose there, so do relatively innocent holders of index funds that happen to include JPMorgan stock. Moreover, $3.5 billion of this particular cash settlement may <a href="http://www.huffingtonpost.com/2013/09/30/jpmorgan-washington-mutua_n_4019653.html">come out of the hide of the FDIC</a>, as part of a dispute over who owns liability for the failed bank Washington Mutual, which JPMorgan bought in 2008. And, the company gets to <a href="http://thinkprogress.org/economy/2012/10/15/1011381/a-big-loophole-lets-wall-street-banks-write-off-government-fines-on-their-taxes/">write off regulatory fines</a> as a tax deduction, saving billions more. Finally, if this deal works like those <a href="http://www.nytimes.com/2013/10/17/business/fewer-homeowners-than-expected-helped-by-mortgage-settlement.html">drawn up by the feds</a> in the past, the $4 billion in mortgage relief is hardly a punishment, allowing the bank to get credit for routine actions in its financial interest—modifying loans for borrowers brings in more money than foreclosing on them, for example, and donating homes they cannot sell frees them from maintenance and upkeep (JPMorgan recently <a href="http://www.housingwire.com/articles/27511-jpmorgan-chase-donates-250-million-in-free-discounted-homes?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29">donated $250 million in homes</a>). So what looks like a debilitating $13 billion penalty is actually much lower, with no meaningful impact on future behavior.</p>
<p><span style="line-height: 1.538em;">The real exposure here for JPMorgan Chase concerns whether they will have to admit they knowingly sold mortgage securities to investors backed by shoddy loans. That’s because a damaging admission could be used as evidence in private litigation from investors worldwide, many of whom are actively suing JPMorgan and other banks. With mortgage-backed securities a multi-trillion-dollar market, this would defeat the purpose of a “pay for peace” deal, and cause many more headaches for the bank than it relieves. Outside of actually sending executives to jail, forcing serious admissions of wrongdoing in the settlements would create the best deterrent for future misconduct; if outside entities can capitalize on them and sue for damages, the crime would no longer pay.</span></p>
<p><span style="line-height: 1.538em;">JPMorgan Chase has conceded wrongdoing in regulatory actions recently. Earlier this month, they had to admit guilt in a $100 million settlement with the </span><a href="http://www.bloomberg.com/news/2013-10-15/jpmorgan-said-to-settle-cftc-london-whale-probe-for-100-million.html" style="line-height: 1.538em;">Commodity Futures Trading Commission</a><span style="line-height: 1.538em;"> (CFTC) and a $200 million settlement with the </span><a href="http://online.wsj.com/news/articles/SB10001424127887323527004579079411558707586" style="line-height: 1.538em;">SEC</a><span style="line-height: 1.538em;">, both over the “London Whale” trades, the bad derivatives bets that lost the bank over $6 billion and cost them over $1 billion in fines in all. The admissions are part of a new strategy by Mary Jo White, the new chairwoman of the SEC, to force companies accused of wrongdoing to declare guilt. Prior settlements allowed firms to “neither admit nor deny” the allegations that formed the complaint, turning regulatory enforcement into a mere </span><a href="http://www.nytimes.com/2011/11/29/business/judge-rejects-sec-accord-with-citi.html?pagewanted=all" style="line-height: 1.538em;">cost of doing business</a><span style="line-height: 1.538em;">. White vowed to stop using “neither admit nor deny” language in many of its enforcement actions. This has bolstered the resolve of other agencies, like the CFTC, to force their own admissions of culpability.</span></p>
<p><span style="line-height: 1.538em;">Unfortunately, in practice, the admissions of wrongdoing appear to be an end unto themselves, not a way to advance legal woes for misconduct. The wording in JPMorgan’s </span><a href="http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965#.UmVF9xYSO2w" style="line-height: 1.538em;">settlement with the SEC</a><span style="line-height: 1.538em;">, for example, was </span><a href="http://articles.washingtonpost.com/2013-09-19/business/42200577_1_jpmorgan-chase-liability-agency" style="line-height: 1.538em;">carefully crafted</a><span style="line-height: 1.538em;"> to only relate to a lapse in internal risk management controls, such as a failure to ensure that public disclosures to investors were accurate. These comprise violations of federal regulations, and only the government could sue on the basis of these admissions, not outside litigants. Similarly, the JPMorgan </span><a href="http://www.cftc.gov/PressRoom/PressReleases/pr6737-13" style="line-height: 1.538em;">settlement with the CFTC</a><span style="line-height: 1.538em;">, which was softened through negotiations, only states that traders “</span><a href="http://dealbook.nytimes.com/2013/10/15/jpmorgan-said-to-reach-deal-with-trading-regulator/?_r=0" style="line-height: 1.538em;">acted recklessly</a><span style="line-height: 1.538em;">” in making an aggressive series of trades that moved market prices. While this focuses on the actual trading practices of the bank instead of internal corporate governance practices, failing to force an admission of market manipulation, only the reckless use of “manipulative devices,” means that other participants in the market could not use the CFTC settlement to raise their own cases. JPMorgan Chase also limited the admission of reckless conduct to one trading day, February 29, 2012, with the bank neither admitting nor denying wrongdoing on subsequent trading. So a market participant would have to claim that they were in the market on February 29, and took losses that they were unable to recoup as a result of those activities. This raises the bar significantly for private lawsuits.</span></p>
<p><span style="line-height: 1.538em;">All of this makes the employment of admissions of wrongdoing more symbolic than legitimate. While it may be nice for Mary Jo White to say that she forced JPMorgan Chase to concede guilt, it doesn’t materially affect the bank’s legal exposure in any way. After all, the bank only had to admit to securities law violations that it already settled. The real victims of the misconduct—investors who were lied to about the stability of the bank’s trades—are out of luck. And this is not an isolated incident—</span><em style="line-height: 1.538em;">Bloomberg</em><span style="line-height: 1.538em;">’s </span><a href="http://www.bloomberg.com/news/2013-08-19/did-falcone-commit-wrongdoing-without-breaking-law-.html" style="line-height: 1.538em;">Jonathan Weil</a><span style="line-height: 1.538em;"> noticed the use of a meaningless admission of guilt in the SEC’s settlement with hedge fund trader Philip Falcone, with language assuring that, despite the admission, Falcone retained the “right to take legal or factual positions in litigation or other legal proceedings in which the commission is not a party.”</span></p>
<p><span style="line-height: 1.538em;">Meanwhile, the SEC continues to use “neither admit nor deny” language in </span><a href="http://dealbook.nytimes.com/2013/10/16/knight-capital-to-pay-12-million-fine-on-trading-violations/?partner=socialflow&amp;smid=tw-nytimesbusiness&amp;_r=1" style="line-height: 1.538em;">other settlements</a><span style="line-height: 1.538em;">. And they’ve been credibly accused of </span><a href="http://online.wsj.com/news/articles/SB10001424052702304384104579141863675545256" style="line-height: 1.538em;">padding their stats</a><span style="line-height: 1.538em;"> by targeting low-level offenders for enforcement actions, many on the final day of September in an effort to boost their total number of cases for the last fiscal year. This paints a dispiriting picture of White’s tenure, concerned more with maintaining a positive public image and following through on a “get-tough” promise, rather than actually getting tough.</span></p>
<p><span style="line-height: 1.538em;">So if and when the Justice Department secures this deal with JPMorgan Chase, looking at the fine print will be crucial. Will the DOJ follow the lead of the SEC and CFTC, and generate admissions of wrongdoing that look good in headlines but have no actual value? Or will they force a serious admission, aiding the multiple active lawsuits from investors in mortgage-backed securities?</span></p>
<p><span style="line-height: 1.538em;">Perhaps the Justice Department will fall back on their retaining the ability for criminal prosecutions to excuse a toothless admission of wrongdoing. But a criminal lawsuit out of California has apparently been </span><a href="http://www.reuters.com/article/2013/09/23/us-jpm-mbs-california-idUSBRE98M13020130923" style="line-height: 1.538em;">set to go</a><span style="line-height: 1.538em;"> since late September without being filed. JPMorgan Chase CEO Jamie Dimon’s </span><a href="http://dealbook.nytimes.com/2013/10/20/u-s-deal-with-jpmorgan-spurred-by-a-phone-call/?src=recg" style="line-height: 1.538em;">charm offensive</a><span style="line-height: 1.538em;"> has forestalled any damaging actions so far. To date, the only criminal prosecution of the bank over its string of misdeeds comes out of </span><a href="http://www.ft.com/cms/s/0/ab5ef6be-2c25-11e3-acf4-00144feab7de.html?ftcamp=published_links%2Frss%2Fhome_europe%2Ffeed%2F%2Fproduct" style="line-height: 1.538em;">Italy</a><span style="line-height: 1.538em;">, and it’s too small of a case to matter to the bank’s bottom line.</span></p>
<p><span style="line-height: 1.538em;">If this deal will be used by the Justice Department as a model for future cases, as </span><a href="http://online.wsj.com/news/articles/SB10001424052702303672404579147550789233662" style="line-height: 1.538em;">reports suggest</a><span style="line-height: 1.538em;">, then they must force JPMorgan Chase to explicitly state the reason they’re paying $9 billion and committing $4 billion in mortgage relief. Part of the role of regulators and law enforcement is to compel enough of a price for bad behavior to prevent it from ever happening again. Extracting unusable admissions that amount to statements of negligence only serves to try and shame the bad actors, which when it comes to Wall Street is a fairly impossible act.</span></p>
</div></div></div>Tue, 22 Oct 2013 13:15:46 +0000219003 at http://prospect.orgDavid DayenHomeowners vs. Big Bad Bankshttp://prospect.org/article/homeowners-vs-big-bad-banks
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<p><span class="dropcap">I</span>n June, six former employees of <span style="line-height: 1.538em;">Bank of America's</span><span style="line-height: 1.538em;"> loan-modification department </span><a href="http://www.salon.com/2013/06/18/bank_of_america_whistleblowers_bombshell_we_were_told_to_lie/" style="line-height: 1.538em;">testified in court</a><span style="line-height: 1.538em;"> that since 2009, they had been instructed to lie to struggling homeowners, hide their financial documents, and push them into foreclosure. In the most egregious example, the employees said they were offered Target gift cards as a bonus for more foreclosures, which generated lucrative fees for the bank. The employees, who were in charge of implementing the government’s Home Affordable Modification Program (HAMP) at the bank, described the same deceptive practices across the country.</span></p>
<p>Two weeks ago, U.S. District Court Judge Rya Zobel <a href="http://www.gpo.gov/fdsys/pkg/USCOURTS-mad-1_10-md-02193/pdf/USCOURTS-mad-1_10-md-02193-3.pdf">dismissed the case</a>, denying class-action certification to 43 homeowners in 26 states who suffered because of similar conduct. “Plaintiffs have plausibly alleged that Bank of America utterly failed to administer its HAMP modifications in a timely and efficient way,” Zobel agreed, adding that vulnerable homeowners had to wade through a “Kafkaesque bureaucracy,” and that the legal claims of missing documents, arbitrary denials, and deliberate misinformation “may well be meritorious.” But she would not grant class-action status because of differences in the individual cases. Homeowners are now free to pursue cases on their own, but the advantage of class-action suits is that they put expensive and burdensome litigation within reach for victims; if these homeowners had the money to sue powerful banks, they probably wouldn’t have needed a loan modification in the first place.</p>
<p>A decade ago, homeowners may not have faced the same hurdles in litigation. But a more stringent test for class-action certification, formed by precedents reaching all the way to the Supreme Court, has become another tool for large corporations to resist accountability. Class-action suits can have a societal benefit, exposing systemic wrongdoing and bringing an end to it. But if nobody can acquire class-action status, the courthouse doors have been effectively shut to a large number of Americans.</p>
<p>Without class actions, individuals face the hurdle of asymmetrical legal warfare, pitting a resource-constrained victim against a deep-pocketed corporation. And because individual damages are far lower than in a case affecting thousands or millions of people, it becomes difficult to find a lawyer willing to take the case. “Low-value claims mean a lot to individuals living paycheck to paycheck,” said Michelle Schwartz, an attorney at the Alliance for Justice, a progressive organization focused on the judiciary. “But banding together is the only way to get into court. A personal lawyer on a mission might take the case, but they would have to bankrupt themselves in order to do it.”</p>
<p>The most dramatic example of how courts have restricted class-action suits is the 2011 Supreme Court ruling, <a href="http://en.wikipedia.org/wiki/Wal-Mart_v._Dukes"><em>Wal-Mart v. Dukes</em></a>. Led by former store-greeter Betty Dukes, 1.5 million women banded together to argue gender discrimination in pay and promotion policies at the world’s largest retailer. They pursued class-action status to sanction Wal-Mart because they could better show the reduced pay and fewer opportunities for advancement for women as a pattern and practice. “Standing on their own, you might not see the pattern, but when you see this has happened to hundreds or thousands—or in the case of Wal-Mart, 1.5 million people—you can make the case that it’s not an isolated incident,” says Schwartz.</p>
<p>But the Supreme Court reversed three lower-court rulings and <a href="http://www.salon.com/2011/06/20/supreme_court_sides_with_wal_mart/">denied class-action status</a> in <em>Wal-Mart v. Dukes</em>, essentially arguing that the retailer had discriminated against so many women that they couldn’t possibly have all faced the exact same type of marginalization. Moreover, the Court set a precedent that limits class-action certification. Whereas before, class-action certification mainly hinged on whether the claims boiled down to a common question—whether gender discrimination had occurred, for example—in the <em>Wal-Mart v. Dukes </em>ruling, the Court said plaintiffs must prove whether the commonality of those claims was the most important factor in the case. That required law firms to obtain evidence, previously confined to the discovery phase, showing that the similar nature of the claims was the most relevant factor in the case. This adds to the expense of the class action at the outset, and heightens the burden on the plaintiffs in order to get certification for a class-action suit.</p>
<p>This has led to predictable consequences. Circuit Courts of Appeal have <a href="http://afjjusticewatch.blogspot.com/2012/07/one-year-later-consequences-of-wal-mart.html">followed the <em>Wal-Mart</em> precedent</a>, denying class-action status in multiple cases. Class actions involving securities law <a href="http://www.law360.com/classaction/articles/425243/securities-class-action-settlements-hit-14-year-low-in-2012">hit a 14-year low</a> in 2012, and accounting class actions last year were <a href="http://www.law360.com/classaction/articles/431264/accounting-class-actions-plummeted-in-2012-report-finds">nearly cut in half</a>. In 2012, employers settled <a href="http://www.seyfarth.com/news/2129">fewer class-action discrimination suits</a> than at any time over the past decade, and the top ten settlements of the year totaled $48.65 million, compared with $346.4 million in 2010, before <em>Wal-Mart</em>. Meanwhile, the Wal-Mart women started pursuing claims 12 years ago, and none of them have had their day in court yet.</p>
<p>In the <a href="http://www.chicagotribune.com/business/sns-rt-us-bankofamerica-mortgages-lawsuit-20130905,0,1654566.story">Bank of America case</a>, Judge Zobel determined that individual borrowers had to jump through so many hoops in the loan-modification process—certifying they lived in the residence and could not afford their monthly payments, documenting their income, making required trial payments, and potentially seeking credit counseling—that no two cases were similar enough to grant certification as a class. In other words, the very convoluted nature of the process at Bank of America <em>protected</em> the company from the suit. Additionally, Judge Zobel cited discrepancies on whether certain members of the class actually made their trial payments on time, turned in the correct documents, or lived in the homes being foreclosed upon, arguing that these inconsistencies would have to be litigated individually. But that grants tremendous discretion to the bank to simply muddy up the records (which they are in fact accused of doing) and evade class action on the larger question of denying eligible borrowers a loan modification. In a tragicomic example, Bank of America claimed that one plaintiff, Aissatou Balde, did not seek credit counseling when required; Balde claims that she never obtained credit counseling because the phone number Bank of America gave to her for their credit counselor was faulty.</p>
<p>While the judge cited the proliferation of mortgage-related cases working through courts to argue that “individual plaintiffs are normally well-motivated to bring any claims they might have in order to save their homes,” the reality is that almost all of these plaintiffs don’t have the funds to pursue a case against Bank of America on their own.</p>
<p>Zobel cited the <em>Wal-Mart</em> case near the end of her ruling to bolster her argument that “there is no commonality where plaintiffs did not suffer the same injury from the same practice.” But <em>Wal-Mart</em> is far from the only example of the Supreme Court limiting class-action cases. The 2011 ruling in <a href="http://en.wikipedia.org/wiki/AT%26T_Mobility_v._Concepcion"><em>AT&amp;T Mobility v. Concepcion</em></a> allowed companies to make their customers sign contracts forcing any complaints to go through a “mandatory arbitration” process, taking away an individual’s right to sue whether alone or in a class action. <a href="http://classactionblawg.com/2013/06/20/supreme-court-says-arbitration-trumps-class-actions-once-again-in-amex-iii/">Numerous</a> other <a href="http://www.scotusblog.com/case-files/cases/comcast-v-behrend/">cases</a> have constrained class actions in recent years. “They’re creating an impenetrable fortress around corporations and the Supreme Court is helping them do it,” said Schwartz. As Elizabeth Warren noted in a speech last week at the AFL-CIO convention, a <a href="http://www.minnesotalawreview.org/wp-content/uploads/2013/04/EpsteinLanderPosner_MLR.pdf">recent study</a> found that the five conservative Justices are among the top ten most pro-corporate in the past 50 years, and that Justices Samuel Alito and John Roberts are numbers one and two. “Sooner or later, <span style="line-height: 1.538em;">you’ll end up with a Supreme Court that functions as a wholly owned subsidiary of big business,</span><span style="line-height: 1.538em;">” Warren said.</span></p>
<p>Class-action suits are an imperfect way to get restitution for a group of individuals. The real remedy to stop homeowners from being snookered by banks is for law enforcement to start throwing executives in jail. But class actions can bring to light systematic illegal activities and can lead to legitimate changes in corporate behavior. Reforms to the tobacco industry and auto safety have come from class actions. “They’re really acting as a private Attorneys General, bringing cases on behalf of the public, and it’s often a way you can bring an end to wrongdoing,” says Schwartz of the Alliance for Justice.</p>
<p>Sadly, the actual attorney general has walked off the playing field when it comes to prosecuting financial fraud. In the Bank of America case, the ex-employees delivered a road map for what the company did and how they did it, even naming specific executives who directed the conduct and citing documentary evidence in the form of email communications. But it took victims attempting to certify a class-action suit, not a federal investigation, to bring these misdeeds to light. And because of the way in which big business has pushed the courts to their side, even that class action will amount to nothing.</p>
</div></div></div>Tue, 17 Sep 2013 12:42:28 +0000218741 at http://prospect.orgDavid DayenForeclosure Fiascohttp://prospect.org/article/foreclosure-fiasco
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span class="dropcap">“L</span>et’s kill all the lawyers,” Shakespeare demanded over 400 years ago. These days, lawyers have taken a back seat to Wall Street as the main target of public ire. But when a bank sues a homeowner for foreclosure or engages in any other legal action related to delinquent mortgages, they hire a law firm to represent them. Nicknamed “foreclosure mills” because of the relentless churn of cases they take on, these firms are complicit in much of the misconduct we attribute to banks throughout the foreclosure process. There’s a long list of documented abuse by foreclosure mills, which are often specialist law firms built to handle thousands of foreclosures at once. Because of their financial incentives, firms are rewarded for each action they take and frequently cut corners on legally mandated steps of the process. And like everyone else along the foreclosure chain, foreclosure mills have faced virtually no accountability for their misconduct. “It’s the crookedest thing I’ve ever seen in 38 years of law practice,” said Blair Drazic, a defense attorney in Grand Junction, Colorado.</p>
<p>But Colorado is the place where justice might finally get served, thanks to an investigation by state Attorney General John Suthers into the billing practices of leading foreclosure mills. The case, which has not yet led to charges, has so far featured allegations of bill-padding, collusion, destruction of evidence, and lobbying for personal gain. If Colorado is successful in reining in the worst conduct of the foreclosure mills, it could spark more scrutiny of their practices across the country.</p>
<p>In most states, one or two law firms conduct almost all legal operations tied to foreclosures. One firm carries out all the foreclosures in Michigan, for example, and another does every one in Washington state. Geoff Walsh of the National Consumer Law Center (NCLC) says this has to do with the technology particular to servicing mortgages. “There are computerized records and servicing platforms, and these law firms get tied into them,” says Walsh. “For most firms, this becomes all they do.” When the foreclosure crisis intensified in 2007, firms could squeeze out massive profits from kicking people out of their homes.</p>
<p>Having mini-monopolies means that firms can set their own standard practices, leading to multiple ethical lapses. Foreclosure mills actively participated in presenting robo-signed and false documents to state courts, in many cases mocking up the documents themselves. A <a href="http://www.motherjones.com/politics/2010/07/david-j-stern-djsp-foreclosure-fannie-freddie"><em>Mother Jones</em> investigation</a> in 2010 exposed the David J. Stern Law Firm in Florida for backdating notarized documents and engaging in other falsifications. Subsequent investigations have revealed this is a <a href="http://www.salon.com/2013/08/12/your_mortgage_documents_are_fake/">routine practice</a> at other foreclosure mills. Every time a state forces lawyers to personally attest to the validity of documents, such as in <a href="http://blogs.wsj.com/developments/2011/11/07/nevada-foreclosure-filings-dry-up-after-robo-signing-law/">Nevada</a>, <a href="http://www.nytimes.com/2013/07/28/realestate/awaiting-foreclosure-relief.html?_r=0">New York</a>, or <a href="http://blogs.palmbeachpost.com/realtime/2013/08/14/steep-drop-in-county-foreclosures-attributed-to-new-law/">Florida</a>, foreclosure cases plummet.</p>
<p>Foreclosure mills are hired by mortgage servicers, companies that handle the day-to-day operations on mortgages but do not own the underlying loans. This is a major problem because mortgage servicers (frequently arms of big banks like Bank of America and JPMorgan Chase) want different things out of a foreclosure than the loan owners (who could be any investor, from a public pension fund to mortgage giants Fannie Mae and Freddie Mac) do. Investors in the loans frequently benefit from modifying a loan instead of foreclosing. But the mortgage servicer financially benefits from foreclosure because their compensation is structured in such a way that a modification hurts their bottom line.</p>
<p>In a case like the one filed by Colorado attorney Blair Drazic, <span style="line-height: 1.538em;">it would have made more sense for the owner of the loan to modify: The home</span><span style="line-height: 1.538em;"> has an appraised value of $100,000, but the client could pay up to $1,200 a month to stay, which works out to about $432,000 on a 30-year payment schedule. But the foreclosure mill, acting at the behest of the servicer, pursued foreclosure instead. “This is a property only my clients could love,” Drazic says. “It’s a conflict of interest. The foreclosure mill purports to represent the [investors], but they’re throwing them on the street.” In another Drazic case, his client has a Federal Housing Administration (FHA) loan, and FHA guidelines clearly show that the servicer must pursue a modification before pursuing foreclosure. But the foreclosure mill ignored this practice. “The law firm is interfering with my client’s right to a modification,” Drazic says. “There’s so much money involved, it’s like the three monkeys—see no evil, hear no evil, speak no evil.”</span></p>
<p>In some states, the denial of modifications by foreclosure mills has become systematic. In New York, the Steven J. Baum Law Firm <a href="http://dealbook.nytimes.com/2011/11/21/foreclosure-firm-steven-j-baum-to-close-down/">went out of business</a> in 2011 over <a href="http://www.nytimes.com/2011/10/29/opinion/what-the-costumes-reveal.html?_r=0">leaked pictures of a Halloween party</a> featuring their employees dressed as homeless people. But before that, they flouted a state law requiring all foreclosure cases to go to a settlement conference where the borrower and the bank could work out a modification. Law firms have to file a “request for relief” to trigger the settlement conference. But the firm simply stopped filing the requests, creating a “shadow docket” of tens of thousands of foreclosure cases. MFY Legal Services, Inc. actually sued the law firm to <em>speed up</em> the foreclosure process and give their borrowers a shot at relief. Baum <a href="http://www.ag.ny.gov/press-release/ag-schneiderman-announces-4-million-settlement-new-york-foreclosure-law-firm-steven-j">paid $4 million</a> to the state for other violations before closing, but efforts to relieve the shadow docket in New York have stalled.</p>
<p>The investigation in Colorado involves something more akin to petty theft. Colorado is a nonjudicial foreclosure state, so foreclosure mills don’t have to take homeowners to court, but they must carry out various legal actions related to foreclosure, like posting a legal notice on the door of homes in foreclosure, informing the owners of their rights. Attorney General Suthers, a Republican, <a href="http://www.denverpost.com/breakingnews/ci_20712627/colorado-ag-requests-lawyers-documents-from-four-county">requested documents</a> from county public trustees offices in May, which showed billing statements from foreclosure mills. While the cost to a foreclosure mill of attaching the notices to the door costs at most $25, firms were charging as much as $300, a twelve-fold markup. “The scope of the investigation is very simple,” said Assistant Attorney General Erik Neusch in one court proceeding. “Why [attorneys] charge more than their actual costs.”</p>
<p><a href="http://www.denverpost.com/realestatenews/ci_23833815/ag-lawyer-e-mails-indicate-collusion-control-foreclosure?source=pkg">Further filings</a> by Suthers show that Castle Law Group and Aronowitz &amp; Mecklenberg, Colorado’s two biggest foreclosure mills, bought specific process-server companies which did the actual work of posting the legal notices, and then colluded with one another to fix the price for posting notices at levels well above the actual cost (“I just wanted our offices to try and get on the same page on what we are charging for all of this,” wrote Stacey Aronowitz to Caren Castle in one 2009 e-mail). The firms then lobbied the state to mandate a <em>second</em> notice, which increased their profits two-fold. The firms earned $20 million over the past four years just on posting notices.</p>
<p>The homeowner must pay all legal fees to “cure” the default and stop foreclosure, or else they lose their homes. In one recent <a href="http://www.denverpost.com/realestatenews/ci_23885908/foreclosure-lawyers-charge-some-homeowners-nonexistent-cases?source=pkg">revelation</a>, Colorado foreclosure mills charged homeowners thousands of dollars for <em>nonexistent cases</em> that they never filed. In the event of a foreclosure sale, the investors in the loan get reduced value relative to a modification, and the legal fees are thrown on top of that. This amounts to law firms “stealing from their own clients,” says Drazic.</p>
<p>Foreclosure mills <a href="http://www.denverpost.com/business/ci_23643760/denver-judge-orders-foreclosure-lawyer-comply-investigation?source=pkg">tried and failed</a> to keep the investigation sealed from the public. Castle Law Group and Aronowitz &amp; Mecklenberg, the state’s two largest foreclosure mills, <a href="http://www.denverpost.com/business/ci_23761943/states-biggest-foreclosure-law-firm-fights-subpoena-records?source=pkg">counter-sued</a> the attorney general directly to prevent subpoenas for internal documents, arguing that they would violate attorney-client privilege. Then, in July, Susan Hendricks, a former associate at Aronowitz &amp; Mecklenberg, <a href="http://www.denverpost.com/business/ci_23734834/colorado-attorney-turned-whistle-blower-alleges-foreclosure-abuses?source=pkg">came forward</a> to allege additional <a href="http://www.denverpost.com/business/ci_23788027/colorado-foreclosure-firm-hot-seat?source=pkg">misconduct</a> at the firm, including padding fees, keeping refunds due to its clients, and destroying evidence essential to the investigation. Aronowitz &amp; Mecklenberg sued unsuccessfully to prevent Hendricks’ testimony from going public, claiming that she was a “special counsel” to the firm, and that her information would also violate attorney-client privilege.</p>
<p>The Colorado investigation could prove a first crack in a system of profit-gouging and unethical conduct that stretches back years. In states where banks don’t have to go to court to foreclose on a homeowner, legal fees are harder to uncover, and it takes sustained oversight, like what we’re seeing in Colorado, to get results. Previous investigations have led to <a href="http://4closurefraud.org/2011/03/25/marshall-c-watson-florida-attorney-general-pam-bondi-settles-investigation-against-one-of-floridas-largest-foreclosure-firms/">minimal fines</a>, and sanctions through judicial conduct reviews have been nonexistent. One foreclosure mill in Florida, Marshall C. Watson, <a href="http://www.abajournal.com/news/article/head_of_fla._foreclosure_mill_firm_agrees_to_shut_down_law_practice/">closed down their office</a> after a State Bar disciplinary action, only to <a href="http://www.bardinelaw.com/news,marshall-c-watson-name-change-i-dont-think-so">open it again</a> with a different name and the same clients.</p>
<p>Lawyers who deal with foreclosure mills are struck by the ethical lapses of the attorneys at those firms, and how they could work on such criminal financial industry activities without speaking up. Says Drazic, “I used to represent murderers, and I wouldn’t represent these people.”</p>
</div></div></div>Thu, 22 Aug 2013 13:04:29 +0000218547 at http://prospect.orgDavid DayenThe Commodities Market: A Big Bank Love Storyhttp://prospect.org/article/commodities-market-big-bank-love-story
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<p><span class="dropcap">W</span>ho becomes the next Federal Reserve chair matters, not only because of the implications for economic and monetary policy, but because the Fed remains one of the nation’s chief financial regulators. There are dozens of policies, some we don’t even know about, over which the Fed wields critical influence. While the past year has seen a small but important shift toward tighter controls, particularly on the largest Wall Street institutions, all of that could change if President Barack Obama selects another deregulator in the Greenspan tradition.</p>
<p>A perfect example of the Fed’s centrality to the financial regulatory space came last week, when a Senate hearing focused on an unseemly practice that the Fed perpetuated and has the power to stop. As reported in <em><a href="http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?src=me&amp;_r=1&amp;">The New York Times</a></em> and elsewhere, large investment banks like Goldman Sachs have <a href="http://dealbook.nytimes.com/2010/02/19/goldman-buying-metals-warehouser-metro/">purchased warehousing facilities</a> for aluminum and shuffled the product from one facility to another. When a purchaser buys the metal, it finds it takes much longer—up to 18 months in some cases—to satisfy their order. Buyers pay rent on the storage in the meantime, but Goldman makes its real money, in this case, on trading in aluminum futures.</p>
<p>As <a href="http://ftalphaville.ft.com/2013/07/22/1575852/commodities-and-banks-a-recap/">Izabella Kaminska</a> explains, a commodity market is in a situation called a “contango” when the future price is higher than the cash price for immediate delivery (known as the spot market). Investment banks that own large warehousing facilities (and through control of the market, can warehouse at a below-market rate) can make lots of money from more passive speculators and purchasers, who will buy futures at the higher price. After the Great Recession, contango yields rose significantly, because lower consumer demand meant that purchasers just wanted a place to store commodities like aluminum until they needed it. Shuffling around the aluminum also creates the illusion of scarcity in supply, increasing prices. Even though only 5 percent of the world’s supply of aluminum passes through Goldman’s warehouses, the “premium” price of storage added to purchases on the spot market affects the other 95 percent, and Goldman’s shenanigans increase the premium, along with the profits. Moreover, if the banks know that there’s this “dark inventory” that they can put on the market at any moment, they have a knowledge advantage that can be used to make more trading profits. Ultimately, these costs are passed on to the consumer, who pays more for beer or soft drinks.</p>
<p>When done properly, commodity trading can limit price spikes for producers. But when a speculator can own commodity assets or the physical commodity itself—as banks are starting to do with <a href="http://ourfinancialsecurity.org/2012/12/afr-statement-on-sec-approval-of-copper-etfs/">copper</a> and <a href="http://www.washingtonsblog.com/2013/07/giant-banks-take-over-real-economy-as-well-as-financial-system-enabling-manipulation-on-a-vast-scale.html">several other products</a>—profits extracted from speculation can soar, to the detriment of producers and consumers. As University of North Carolina law professor Saule Omarova said in a Senate Banking Subcommittee hearing on the subject, “Investment banks are turning into trade and financial super-intermediaries. … Bank holding companies should not be involved in this.” Josh Rosner, a financial analyst, compared the situation to the housing bubble, when banks went from making loans to taking over the entire mortgage complex. In this case, they went from being speculators to having large ownership stakes in the commodities or elements that move commodity prices. In securing funding for these commodity purchases, Rosner notes, banks pitch investors on the “advantage of monopolistic and quasi-monopolistic assets, allowing prices to rise even when demand falls.”</p>
<p>The aluminum shuffle did raise the attention of Congress, which held hearings last week. The fact that commercial users of aluminum include multinational corporations like Coca-Cola and beer makers, which have clout in Washington and factories that employ large numbers of people, may mean that the banks overreached here. But even if this opportunity <a href="http://www.bloomberg.com/news/2013-07-24/goldman-made-a-mint-hoarding-metal-so-what-.html">is ending</a>, the question remains: Why are mega-banks allowed to purchase commodity assets or physical commodities and manipulate prices to their benefit in the trading markets?</p>
<p>The answer is the Federal Reserve, which granted exemptions to firms restricted by the Bank Holding Company Act from making investments in nonfinancial businesses. A 2003 rule determined that “certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” and later exemptions allowed ownership of trading assets like warehouses, power plants or oil storage tanks. About a dozen banks took advantage of this Fed ruling. In addition, part of the Gramm-Leach-Bliley Act—which eliminated the Glass-Steagall firewall between commercial and investment banks—allowed investment banks that converted to bank holding companies (basically, companies that control a deposit-taking bank; Goldman Sachs and Morgan Stanley did this in 2008 to gain access to the Federal Reserve’s emergency lending facilities) to “grandfather” in their asset holdings, as well as engage in so-called merchant banking activities, like buying up commodities. It appears to be easy for bank holding companies to justify their nonfinancial purchases as part of those merchant banking investments. There’s also little transparency in these approvals; Senator Sherrod Brown, who chaired last week’s subcommittee hearing, noted that the form banks have to fill out to justify their merchant banking acquisitions to the Fed is not even available to the public.</p>
<p>In his three-point plan for ending the physical commodity shuffle, Brown targeted the Fed’s opaque operations facilitating massive bank profits. “The Federal Reserve must issue clear guidance on permissible non-bank activities,” Brown wrote, “and consider placing limitations on those that expose banks and taxpayers to undue risk.” In June, Congressman Alan Grayson and three colleagues highlighted multiple examples of bank ownership of commodities in a <a href="http://big.assets.huffingtonpost.com/LetterToFedGoldmanUranium.pdf">letter to the Fed</a>. “Goldman Sachs, JP Morgan, and Morgan Stanley are no longer just banks—they have effectively become oil companies, port and airport operators, commodities dealers, and electric utilities as well,” the letter reads. “This shift has many consequences for our economy, and for bank regulators. We wonder how the Federal Reserve is responding to this shift.”</p>
<p>On the regulatory front, the Fed has been somewhat better of late. Under the direction of Fed Governor Daniel Tarullo, it has approved rules that would increase leverage requirements on the largest financial institutions, forcing them to absorb their own losses rather than throwing them on the taxpayer. Tarullo reportedly faced major resistance from inside the Fed, still populated at the staff level with Greenspan-era officials who never met a regulation they liked. But Tarullo won the day, and in <a href="http://www.huffingtonpost.com/2013/05/03/daniel-tarullo-too-big-to-fail_n_3210863.html">public pronouncements</a> has shown himself attuned to the potential systemic risk associated with giant, interconnected mega-banks. There is also evidence that the Fed is <a href="http://www.reuters.com/article/2013/07/19/us-federalreserve-commodities-banks-idUSBRE96I17A20130719">rethinking</a> not only the exemptions granted to banks to own commodity trading assets but the ability for bank holding companies to trade in physical commodity markets altogether. In advance of this decision, JPMorgan Chase <a href="http://www.ft.com/intl/cms/s/0/4901bdaa-f627-11e2-a55d-00144feabdc0.html#axzz2aBkfdciL">said last Friday</a> it would consider selling its physical commodities unit.</p>
<p>This is why the rumors that President Obama could <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/23/right-now-larry-summers-is-the-front-runner-for-fed-chair/">choose Larry Summers</a> to be Fed chairman are so troubling. As Treasury secretary, Summers oversaw Gramm-Leach-Bliley, as well as deregulation of commodity futures and derivatives. During the Dodd-Frank debate, he reportedly lined up consistently on the side of looser controls on Wall Street. And he showed his cards on regulatory enforcement when <a href="http://www.washingtonpost.com/opinions/how-to-stabilize-the-housing-market/2011/10/23/gIQA7lveAM_story.html">writing about foreclosure fraud</a>, the largest consumer fraud in history, in 2011. While noting that just compensation to victims was legitimate, he added that “allowing negotiation over past actions to be the dominant thrust of policy creates overhangs of uncertainty that impose huge costs on the financial system and inhibit lending.” In other words, when it comes to unethical or even criminal actions by banks, we should look forward and not backward, a position that virtually guarantees future misconduct.</p>
<p>This partially explains why a significant number of liberal Democrats in the Senate have <a href="http://online.wsj.com/article/SB10001424127887324564704578628354053170998.html?mod=WSJ_hps_LEFTTopStories">written to the president</a>, asking him to choose Fed Vice Chair Janet Yellen, the main alternative to Summers, to run the central bank. The ringleader behind that letter was Sherrod Brown, the very senator exploring the expansion of the financial system into these realms of commerce. He understands that letting another deregulator run the Fed will only entrench this concentration of power on Wall Street.</p>
</div></div></div>Mon, 29 Jul 2013 12:58:18 +0000218356 at http://prospect.orgDavid DayenGoing Abroad With Dodd-Frankhttp://prospect.org/article/going-abroad-dodd-frank
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<p>One of the biggest catastrophes of the 2008 financial crisis came out of the <a href="http://www.nytimes.com/2008/09/28/business/28melt.html">AIG Financial Products</a> division, whose disastrous trades eventually led to a $182 billion bailout of the insurance company. One of the largest financial market blowups since the crisis came from the <a href="http://money.cnn.com/2013/03/14/investing/jpmorgan-senate/index.html">Chief Investment Office of JPMorgan Chase</a>, where similar trades backfired and cost the company at least $6.2 billion. The common thread? Both of these offices, despite being subsidiaries of American corporations, were based in London, and they enjoyed a degree of autonomy, both from their management teams and from federal regulators, who were unable to recognize the outsized risk until it was too late.</p>
<p>The Dodd-Frank financial reform law intended to end the practice of financial industry behemoths shifting away their riskiest practices from U.S. regulators’ prying eyes. But a rule that would subject the $630 trillion global derivatives market to the same regulations, no matter the location of the trades, is on life support, thanks to a combination of foreign regulators, bank allies at federal agencies and in Congress, and Treasury Secretary Jack Lew, who may have delivered the final blow last week. The complex battle over derivatives also reflects a battle for the soul of the Democratic Party, between populist reformers and Wall Street-friendly shoe polishers. And while the situation is fluid in advance of a Friday deadline, as it stands now, the shoe polishers are winning.</p>
<p>Derivatives are those massive bets on bets that are only tangentially related to real-world assets, like a rise in home prices or the reduction of the dollar. They accelerated the financial crisis when the housing bubble collapsed, and until recently, they were totally unregulated. But Dodd-Frank included substantial derivatives reform, forcing the trades to run through transparent clearinghouses, and forcing the dealers to carry sufficient capital to cover losses. Most important, under the “cross-border” provision, all affiliates that trade more than $8 billion in derivatives would be subject to the same regulation, regardless of where they are based. That’s crucial, because the five biggest U.S. banks <a href="http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&amp;u=2013_05_15_08_38_c4d6a07e1a4c4c6f932260909fe96d4f_PRIMARY.jpg">control 95 percent of the derivatives market</a>, and they have thousands of overseas affiliates where they often park their trading desks (at least half of their trading takes place overseas, according to <a href="http://business.time.com/2013/07/08/20-words-that-will-make-or-break-financial-reform/">International Financing Review</a>). This allows them to spread risk in unregulated areas, only to plead for federal assistance when it all blows up. “Doing derivatives rules without cross-border is like blocking the front door and leaving the back door wide open,” said Marcus Stanley of Americans for Financial Reform.</p>
<p>Like most Dodd-Frank rules, interpretation was left to a financial regulator, in this case the Commodity Futures Trading Commission (CFTC), under the chairmanship of former Goldman Sachs partner Gary Gensler. Despite early concerns from reformers, Gensler has tirelessly fought Wall Street for the strongest rules possible. He sees cross-border as critical to regulating the derivatives markets, <a href="http://business.time.com/2013/07/08/20-words-that-will-make-or-break-financial-reform/">telling<em> Time </em>magazine</a>, “If we allow (banks) to operate outside these common-sense reforms that Congress has mandated, we will not only have failed the public, but we’ll have repealed derivatives reform altogether.”<br /><span style="line-height: 1.538em;">Gensler needs support from the two other Democrats on the five-member commission to finalize the cross-border rule (Republican Jill Sommers stepped down this week, but Gensler still needs 3 votes out of 4 to pass the rule). Commissioner Bart Chilton is on board, but in late June, Commissioner Mark Wetjen, a Democrat, </span><a href="http://www.cftc.gov/PressRoom/SpeechesTestimony/opawetjen-2" style="line-height: 1.538em;">gave a speech</a><span style="line-height: 1.538em;"> before an industry trade group—predictably, in London—arguing for an “interim final guidance” that “provides sufficient adjustment time for the marketplace.” Gensler recognized this as a call for </span><a href="http://washpost.bloomberg.com/Story?docId=1376-MOYYBP6VDKHV01-2T80DVHC2UPC7MMRDT4M1G6GDF" style="line-height: 1.538em;">delay</a><span style="line-height: 1.538em;">. This is par for the course for Wetjen. I </span><a href="http://prospect.org/article/naming-names-dodd-frank-mess" style="line-height: 1.538em;">wrote</a><span style="line-height: 1.538em;"> in the </span><em style="line-height: 1.538em;">Prospect</em><span style="line-height: 1.538em;"> in May about his bank-friendly tendencies that have already weakened derivatives rules. But delaying cross-border regulation would have a much bigger effect. Gensler is </span><a href="http://www.ft.com/intl/cms/s/0/c7e56bf4-d790-11e2-a26a-00144feab7de.html#axzz2YTHW6BMq" style="line-height: 1.538em;">leaving the CFTC</a><span style="line-height: 1.538em;"> at the end of the year, and postponing the rules until his exit maintains the status quo, and will let Wall Street try their luck with a new Chairman to blow holes in the regulations.</span></p>
<p><span style="line-height: 1.538em;">Gensler has one piece of leverage. Right now, foreign affiliates are protected from the cross-border rules by an exemptive order that expires July 12. Extending it requires a vote, and Gensler controls the calendar. If he lets the exemptive order expire, the language of the Dodd-Frank statute would govern, and all derivatives trades with a “direct and significant connection” to the U.S. economy would fall under the rules. There would be some murkiness in the law without a final guidance, and banks could simply dare the CFTC to enforce the rule. But the uncertainty could also encourage bank lobbyists to pressure backers like Wetjen to get something done.</span></p>
<p><span style="line-height: 1.538em;">Gensler set a July 12 vote on the final cross-border rule, basically daring Wetjen to either cooperate on a solution or allow the exemptive order to expire. But forces outside the CFTC have used their power and influence to take away Gensler’s leverage and force him to soften the rules.</span></p>
<p><span style="line-height: 1.538em;">U.S. banks have cautioned about global competitiveness, though it’s unclear why the CFTC should care whether or not Goldman Sachs’ Hong Kong affiliate can compete with Deutsche Bank’s. Meanwhile, Democratic reformers and Wall Street allies alike have spoken out publicly, reflective of a split within the party. Jeff Merkley and eight Democratic Senators </span><a href="http://www.merkley.senate.gov/newsroom/press/release/?id=D452A900-E124-4C05-998F-80DBB58EA72A" style="line-height: 1.538em;">urged the CFTC</a><span style="line-height: 1.538em;"> to approve the rule without delay, and strengthen it, so that any foreign affiliate whose risk could flow back to the U.S. gets covered by the rules. But a competing </span><a href="http://www.bloomberg.com/news/2013-06-26/u-s-needs-more-time-on-overseas-swaps-democratic-senators-say.html" style="line-height: 1.538em;">letter</a><span style="line-height: 1.538em;"> from New York Senators Chuck Schumer and Kirsten Gillibrand among others, calls for delay until the Securities and Exchange Commission (SEC), which governs a tiny slice of the derivatives market, completes their rules.</span></p>
<p><span style="line-height: 1.538em;">There’s a massive irony here. Delaying cross-border gives Wall Street banks incentive to ship their derivatives trading desks overseas, away from oversight. This has a materially negative impact on New York City, which Schumer and Gillibrand represent. And there’s no greater critic of corporate outsourcing than </span><a href="http://thehill.com/blogs/on-the-money/domestic-taxes/120281-schumer-wants-action-on-outsourcing-bill-before-election" style="line-height: 1.538em;">Chuck Schumer</a><span style="line-height: 1.538em;">. But Wall Street campaign contributions apparently trump parochial interests like the New York economy. (For what it’s worth, the </span><em style="line-height: 1.538em;">New York Times</em><span style="line-height: 1.538em;"> editorial board </span><a href="http://www.nytimes.com/2013/07/05/opinion/the-latest-assault-on-bank-reform.html?src=recg&amp;_r=0" style="line-height: 1.538em;">bashed the Schumer/Gillibrand letter</a><span style="line-height: 1.538em;"> last week.)</span></p>
<p><span style="line-height: 1.538em;">Revealingly, Schumer and Gillibrand addressed their letter not to Gensler, but Treasury Secretary Jack Lew, essentially asking him to step in and get the rule delayed. And it appears he has done so. After a “tense” meeting between Lew, Gensler, and SEC Commissioner Mary Jo White last week, Gensler has </span><a href="http://www.bloomberg.com/news/2013-07-09/fight-over-reach-of-u-s-derivatives-rules-heads-for-showdown.html" style="line-height: 1.538em;">reportedly changed his tune</a><span style="line-height: 1.538em;">, and will seek at least a partial delay of around six months. Gensler is technically an independent regulator, but the Obama Administration has ways of influencing his decisions. Many believe Gensler is being squeezed out of the CFTC, and he at least wants a say in his replacement. In the past couple weeks, former Senate staffer Amanda Renteria, seen as the heir apparent, </span><a href="http://blogs.wsj.com/washwire/2013/07/08/renteria-withdraws-name-for-cftc-spot/" style="line-height: 1.538em;">withdrew her name</a><span style="line-height: 1.538em;"> from consideration. This leaves the seat open, and Gensler knows that, if he wants his rulemaking legacy to endure, he has to knuckle under certain White House demands.</span></p>
<p><span style="line-height: 1.538em;">Lew was acting not just on behalf of Wall Street and its Congressional backers, but foreign regulators, who have become incensed with Gensler usurping their authority to regulate derivatives in their countries. </span><em style="line-height: 1.538em;">The Wall Street Journal</em><span style="line-height: 1.538em;"> </span><a href="http://online.wsj.com/article/SB10001424127887323368704578593964172032682.html" style="line-height: 1.538em;">reports</a><span style="line-height: 1.538em;"> that Lew and White will meet next week with EU Internal Market Commissioner Michel Barnier, the point person for foreign regulators, essentially going around Gensler.</span></p>
<p><span style="line-height: 1.538em;">It looks like a classic territorial dispute. “European regulators probably don’t care how strongly we regulate Goldman Sachs Hong Kong, but they don’t want the CFTC regulating their European banks,” said Americans for Financial Reform’s Marcus Stanley. And that’s a big problem, as foreign banks represent nearly half of all registered swap dealers. Foreign regulators, who have lagged in their rule-writing, want what they call “substituted compliance,” meaning that each country would recognize another’s derivatives rules as equivalent on a presumptive basis (this generally describes the SEC’s approach). Gensler initially rejected this in favor of a step-by-step process to judge compliance. That triggered the complaints by foreign regulators.</span></p>
<p><span style="line-height: 1.538em;">There’s also a status issue here. The CFTC has the smallest budget of any financial regulators, and is entirely dependent on Congress for their funds (the total annual funding for the CFTC is $200 million, about 5 percent of that of the IT budget for </span><em style="line-height: 1.538em;">one</em><span style="line-height: 1.538em;"> global bank). European regulators sniffed at being pushed around by what they perceive as a backwater agency—they euphemistically call it a “lack of cooperation” by the CFTC. And Jack Lew apparently sided with them over his own country’s CFTC chair. Now Gensler has </span><a href="http://www.ifre.com/us-regulator-close-to-deal-with-europe-on-swaps-rules/21095726.article" style="line-height: 1.538em;">floated a compromise</a><span style="line-height: 1.538em;"> that may spare foreign banks from many derivatives rules.</span></p>
<p><span style="line-height: 1.538em;">It’s perhaps not an accident that the smallest and most politically vulnerable financial regulator also governs the riskiest element of financial reform. It puts the CFTC in the position to be rolled, and without the steadfast advocacy of Gensler, it probably would have happened long ago. In fact, this resembles the odyssey of </span><a href="http://www.pbs.org/wgbh/pages/frontline/warning/interviews/born.html" style="line-height: 1.538em;">Brooksley Born</a><span style="line-height: 1.538em;">, the Clinton-era CFTC Chairwoman who also tried to regulate derivatives markets, only to be stymied by Treasury Secretary Robert Rubin and his undersecretary Larry Summers. It’s hard for even qualified and effective regulators to withstand the power of Big Finance, said Marcus Stanley of Americans for Financial Reform. “You’re getting into the backroom wiring of international capital.”</span></p>
</div></div></div>Thu, 11 Jul 2013 13:04:49 +0000218216 at http://prospect.orgDavid DayenMurky Language Puts Homes Underwaterhttp://prospect.org/article/murky-language-puts-homes-underwater
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<p>Revelations from Bank of America whistleblowers show <a href="http://www.salon.com/2013/06/18/bank_of_america_whistleblowers_bombshell_we_were_told_to_lie/">widespread and ongoing abuse of homeowners</a> seeking loan modifications to avoid foreclosure. Customer service representatives were told to lie about pending modifications and were given bonuses for pushing homeowners into default. The allegations mirror continued complaints about “dual tracking,” a practice where mortgage servicers pursue foreclosure while deciding whether or not to grant a loan modification. Servicers at the five biggest banks were required to pay $25 billion in fines and agree to dozens of new guidelines to curb these abuses as part of last year’s National Mortgage Settlement. While the banks argue that they have fixed any outstanding problems, a <a href="http://www.nytimes.com/2013/06/20/business/economy/monitor-finds-lenders-failing-terms-of-settlement.html?smid=tw-share&amp;_r=0">recent report</a> from the settlement’s oversight monitor, Joseph Smith, showed continuing violations in several key areas, though not to the degree that <a href="http://www.huffingtonpost.com/2013/06/19/national-mortgage-settlement-monitor_n_3463180.html">housing advocates claim</a>.</p>
<p>This discrepancy between homeowner complaints and bank pleas of innocence can perhaps be explained by a gap in the settlement’s dual-tracking language, which mirrors other state and federal rules for servicers. The restrictions state that servicers cannot pursue foreclosure once a homeowner turns in a “completed” application for a loan modification. However, the rules do not meaningfully define “completed.” Does this mean the initial delivery of forms and financial documents? Do all documents have to be authorized by the bank? What if documents are lost? What if servicers are missing just one piece of information? It sounds wonky, but banks have exploited these ambiguities for financial gain, and it has led to people losing their homes.</p>
<p>Katherine Porter, a law professor at UC-Irvine and the monitor chosen by California’s Attorney General to oversee the mortgage settlement in the Golden State, has written a <a href="http://californiamonitor.org/wp-content/uploads/2013/06/FINAL-June-19-Complete-App-Monitor-Report.pdf">white paper</a> on the problem. “The path to becoming ‘complete’ often requires dozens of back-and-forth communications between homeowners and banks,” Porter writes. “It drags on for months, creating uncertainty and frustration and putting families at risk of foreclosure.”</p>
<p>A typical loan-modification application includes a standard form, authorization for the release of tax returns, and documents showing evidence of income, like recent pay stubs or a profit-loss statement. Banks require financial documents from homeowners to determine what would make an affordable modified mortgage payment. If a homeowner has a straightforward financial situation, with a single employer and relatively few outside sources of income, collecting financial documents is relatively easy. But lots of people have complex income situations—second jobs, income from renters on their properties, small businesses. The more multifaceted the income sources, the more information a bank will require.</p>
<p>Porter’s report tells the story of “Peggy B.,” who lost her home to foreclosure last November. Peggy was in the process of collecting documents when her home was sold. The bank told her that the sale would be postponed while she complied with requests for documents, but they sold the home anyway. Porter’s office contacted the bank, and “it informed us that Peggy’s application was missing documents at the time of the sale … because her application was not complete, the bank had not violated the dual-tracking protections in the settlement.”</p>
<p>This is not just a problem with the mortgage-settlement standards, but virtually all dual-tracking rules on mortgage servicers. The Consumer Financial Protection Bureau’s (CFPB) servicing rules define a “completed” application as “when a bank receives all the information that the bank requires.” This puts the discretion in the hands of the bank to decide when an application is completed. CFPB states the bank must use “reasonable diligence” to obtain the documents it needs, another term with significant wiggle room.</p>
<p>California enacted a new “Homeowner’s Bill of Rights” this year, which bans dual tracking when an application is completed, defining that as “when the homeowner sends in all the documents required by the bank within a reasonable amount of time.” But that doesn’t fully define “reasonable,” and doesn’t account for back-and-forth on documents with missing information, or lost documents. The legislative analysis from the Homeowner’s Bill of Rights does say it would be unreasonable for banks to file a notice of foreclosure in California during the timeframe it takes for the homeowner to collect documents. But that’s not in the statutory language that banks are required to follow, and courts have not yet ruled on the matter<strong>. </strong>Additionally, banks have been accused of deliberately misplacing documents to delay the modification process. It’s unclear whether that would even violate CFPB or California dual-tracking rules.</p>
<p>Game-playing like this allows banks to ignore modification timelines, while technically staying within the law. Plus, continuing to pursue foreclosure means servicers can increase their profits—by endlessly delaying modifications, servicers can keep their staffs lean, reducing labor costs. And <a href="http://www.washingtonmonthly.com/ten-miles-square/2013/02/new_rules_against_mortgage_ser042915.php">servicer compensation provides an incentive to foreclose</a> over modifying a loan, because they can add on foreclosure fees, and because in a foreclosure sale, losses flow to the owners of the homes, rather than the servicers.</p>
<p>Porter has an elegant solution for this problem, which she describes as a “gap” rather than a loophole. Her proposal would provide protection from foreclosure for any homeowner who turns in the three standard documents—the application for modification, authorization to release tax returns, and “evidence of income"—as long as they respond to this request within 30 days. Servicers would have to pause their foreclosure process as they collect and verify the documents they need, and make a decision on whether to offer a modification. This would especially help homeowners with complex incomes or language barriers, who might need more time to examine and understand all the document components involved. And Porter would include restrictions on homeowners making serial modification requests and never completing the documents, just to stay out of foreclosure.</p>
<p>“This would give incentive to the bank to make people complete,” Porter said in an interview. If servicers could not pursue foreclosure while processing a modification request, she believes, they would act diligently to acquire all necessary documents and make a decision. That’s not currently the case; bank communications with borrowers are often sloppy and confusing, with homeowners unable to decipher the bank’s requests. Porter thinks this change in incentives would go far to clean up the process. “When banks are motivated to get people to respond to their requests, they’re really good at it. Their refinance requests are very streamlined. If the incentives were better aligned, banks would bring their expertise to the problem.” Porter includes in the white paper sample document request letters from banks to homeowners that would make things easier for understand. Banks don’t tell homeowners in a timely manner when specific documents are received and complete, or what is wrong with documents already submitted, and Porter would add a recordkeeping worksheet to the process as well.</p>
<p>Since California enacted the Homeowner’s Bill of Rights this January, servicers in the state, initially wary of testing the law, are pausing their foreclosure pursuits upon initiation of the modification process<strong>, </strong>and keeping them paused as homeowners complete their applications. Despite protests from banks that they could not reasonably stop foreclosures around the country for that long a period, “they’re doing it in California and the world has not ended,” Porter said. Referring to other states like Florida, where the law requires banks to start the foreclosure process over from scratch rather than “pausing,” Porter replied, “We should not let one state’s struggle with the foreclosure system define substantive protections.”</p>
<p>Porter believes that state and federal regulators could reopen servicing standards to define “completed” and realign incentives for banks. Officials overseeing the National Mortgage Settlement are <a href="http://www.huffingtonpost.com/2013/06/19/national-mortgage-settlement-dual-tracking_n_3468307.html">in discussion with banks</a> over making these changes, though because it’s a settlement rather than a court order, they must negotiate with the banks to get sign-off on the proposed new rules. The CFPB could do a technical amendment to their servicing rules to revisit the definition; they would have to go through a public comment phase and would take several months to adopt. Finally, other states could follow California’s lead, and go further, by more rigidly defining a “completed” application. Minnesota had the first chance to do this with their own Homeowner’s Bill of Rights, but they left the “completed” definition vague as well<strong>. </strong></p>
<p>Without changes, banks are likely to continue to string along borrowers with relative impunity. As long as they never complete the application, the foreclosure protections for homeowners never have to kick in. This serves as a lesson for financial regulators—every word in a rule matters. Even “completed.”</p>
</div></div></div>Tue, 02 Jul 2013 12:48:57 +0000218157 at http://prospect.orgDavid DayenHow My 15 Minutes With Marc Maron Changed Everythinghttp://prospect.org/article/how-my-15-minutes-marc-maron-changed-everything
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<p>“A few years ago I was planning on killing myself in my garage, and now I’m doing the best thing I’ve ever done in my life in that same garage,” says comedian Marc Maron in the premiere episode of <em>Maron</em>. The eponymous new show on IFC is an extension of Maron’s real life, and the wildly successful <a href="http://WTF podcast">WTF podcast</a> that resurrected his career. Many of the plots grow out of actual experiences, from tracking down an Internet troll to dating a dominatrix. But the show probably won’t mine what Maron himself would describe as his most painful episode: hosting a liberal political talk radio show.</p>
<p>I know this because I met Marc then, in 2006, when he was in that “planning on killing myself” phase. At the time I was performing random acts resembling stand-up comedy at laundromats and sandwich shops throughout the greater Los Angeles area, while also stepping into political writing with a new and exciting invention of the age called a blog. My comedian friends and I had a somewhat annoying habit back then of loitering in the hallway of the Hollywood Improv on weeknights, poking our heads into the main room to see if anyone interesting was onstage. I ran into Maron in that hallway, and I mentioned that I was sorry to see him leave <em>Morning Sedition</em> , a parody of a “Morning Zoo”-type radio show on the fledgling Air America network.</p>
<p>“Oh, I have a new show now out here, you should come on sometime,” he said.</p>
<p>I had done only a few radio appearances about politics before, and none with anyone I actually aspired to emulate. Maron’s stand-up had always combined sharp insights about the human condition with raw honesty, and anyone trying to balance the tricky combination of generating laughs and advancing a progressive argument was right in my wheelhouse. I had to assume the new show succeeded in this effort, because it was almost impossible to locate on the radio dial, true to the seriousness of effort in liberal talk radio at the time. The L.A.-based station KTLK had existing contracts with basketball and hockey teams that often pre-empted or delayed the show.</p>
<p>It turned out I knew the producer of <em>The Marc Maron Show</em>, and a few weeks later he called to have me on. I drove about an hour to the pre-taping, out to a seedy-looking studio on one of those blinding summer days in Burbank. The producer had flipped through my website, and decided he wanted me to talk about a post I’d written on a massacre in Haditha, Iraq (I think it was <a href="http://d-day.blogspot.com/2006/05/haditha-soldiers-with-nowhere-to-turn.html">this one</a>). This wasn’t exactly the stuff of witty banter between two comics, certainly not the vision I had tucked in the back of my mind for how the appearance would unfold. Maron listened to me stammer out details about dead Iraqi civilians in the scintillating way only someone preparing for his comedy breakthrough can. I brainstormed how to work a one-liner into the discussion, and thankfully came up empty. I don’t remember much of the segment, only the part where it ended and I got up and said, out loud but more to myself, “Well that was hilarious!”</p>
<p>Maron responded, “We always have a few minutes at the end of the show, you want to come back and run a bit or something?”</p>
<p>And at that point I really should have said no, I should have realized that military massacres in Iraq don’t make a great comedy lead-in. But I was kind of desperate to impress, so despite no preparation, I decided to return to the booth to say … well, something.</p>
<p>What followed set a pretty high bar for awkward radio. I launched into this story about a comedian who played my bar mitzvah and who I got to know 20 years later. I was thinking that this was my Carson panel moment, my chance to banter like a pro. Instead, it was punctuated by long passages of silence. Deserved silence, I should add; I was blowing through this story without context, leaving out key details. Maron played along, smiling and nodding, and you could just see his internal clock ticking down the seconds until he could get this rank amateur out of his life. Somehow I worked toward an ending, tossed off the headphones, and flew out the door. The show was cancelled a month or so later, and if you’re reading this, Marc, I’ll take the blame.</p>
<p>In a perfect parallel to the cranky self-centeredness of Maron’s TV show, I’ve now made this story entirely about myself. But through the cringes, I felt like I worked something out in that Burbank radio studio. The story you want to tell dictates the tone, not the other way around. A comedy-and-politics salad too often comes out wilted and soggy, to belabor the metaphor. After the Maron show appearance I stopped striving to find the punch line in my political writing, and started down the various rabbit holes that now occupy my time. It was a kind of turning point.</p>
<p>As he’s expressed, that time period was a turning point for Maron as well. Even brilliant comedians can falter when not playing to their strengths. The story of Maron’s career revival comes directly from when he stopped trying to fit himself into the persona of a liberal pundit<strong>. </strong>In fact, Maron consciously made the decision in 2009, with the start of the WTF podcast, to <a href="http://www.believermag.com/exclusives/?read=interview_maron">abandon the lefty political pose</a>, to stick to real conversations with his fellow comedians, and to indulge his curiosity about people through extended engagement. And it just blew away everything he had been doing in the liberal talk-radio world.</p>
<p>There are definitely good liberal talk-show hosts, even funny ones—Sam Seder, who briefly shared a show with Maron, comes to mind. But it wasn’t Maron’s calling to build the skill of interjecting in regimented ways with guests about predictable targets. With WTF, Maron could bring in his personal baggage and pre-occupations, and let the conversation flow in even uncomfortable directions. Partisans listen to talk radio to have their assumptions validated and their daily outrages chronicled. But it leaves no room for danger, or really anything unexpected. Those missing elements made Maron’s podcast so refreshing and exciting. There’s probably a way to convert the kind of stripped-down real talk that takes place on WTF to the liberal political realm, but programmers don’t like to take chances, and potential interview subjects wouldn’t take the risk of wandering off message. The last thing any politician wants is to actually be freewheeling. Feeding the public their daily indignation is the safe alternative. Maybe that’s why it seems so antiseptic.</p>
<p>At its best, Maron’s new TV show on IFC feels as authentic as the podcast, although the return to a more structured format is occasionally limiting. You want him to spend a whole episode in dialogue with his father (played by Judd Hirsch, and living in a trailer outside Maron’s house), working things through, seeing what happens. The radio segments that bookend the show usually provide set-ups for jokes, rather than plumbing the depths of his interpersonal relationships. Returning to scripted material sometimes borders on being forced.</p>
<p>When the show does succeed—and it’s often brilliant—it comes from the total self-awareness of its lead, his comfort with laying bare a bucket of insecurities, their origins, and his resistance to changing them, sometimes to his detriment. You definitely get a window into Maron’s tortured over-analysis, in a way that gives this world shape and internal logic. It also becomes quite funny. I think Maron almost had to go through the constricting format of liberal talk radio to get to this place. He had to experience the awkwardness of the eight-minute interview with the three important bullet points to know how to discard that and just present himself completely as he is. The artifice has been ripped down.</p>
<p>A lot of Maron’s fans feel like they went through that experience of discovery together. Mine happened to occur during a nightmare radio segment with him. Eventually, we all strive to find our niches, our outlets for creative expression, our best manner of amplifying our voices.</p>
</div></div></div>Wed, 05 Jun 2013 12:26:43 +0000217921 at http://prospect.orgDavid DayenNaming Names in the Dodd Frank Messhttp://prospect.org/article/naming-names-dodd-frank-mess
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span style="line-height: 1.538em;">As we trudge through the swamp of disappointment that defines Dodd-Frank implementation, the liberal commentariat has </span><a href="http://www.washingtonmonthly.com/magazine/march_april_2013/features/he_who_makes_the_rules043315.php" style="line-height: 1.538em;">lately</a><span style="line-height: 1.538em;"> </span><a href="http://www.thenation.com/article/174113/how-wall-street-defanged-dodd-frank" style="line-height: 1.538em;">seized</a><span style="line-height: 1.538em;"> upon a new meme; Wall Street lobbyists are responsible for gutting Dodd-Frank behind closed doors. Big-pocketed firms deploy phalanxes of clever lawyers and influence peddlers that easily outpace reformers, ensuring that the regulations ultimately written are sufficiently defanged to allow the financial industry to conduct its business with few, if any, restrictions. The lobbyists, and mostly the lobbyists alone, bear responsibility.</span></p>
<p>Witness the most recent rollback of Dodd-Frank, a compromise on derivatives regulations by the Commodity Futures Trading Commission (CFTC). <em>The New York Times</em>’ Ben Protess makes the culprit clear in his <a href="http://dealbook.nytimes.com/2013/05/15/compromise-seen-on-derivatives-rule/?partner=rss&amp;emc=rss">Page 1 report</a>: “<em>Under pressure from Wall Street lobbyists</em>, federal regulators have agreed to soften a rule intended to rein in the banking industry’s domination of a risky market.” (Emphasis mine.)</p>
<p>But this gets things backward. Concessions aren’t made without a regulator willing to sit across the table from Mr. Wall Street Lobbyist and agree to his suggestions. Indeed, in the case of the derivatives regulations, one Democratic commissioner on the CFTC, Mark Wetjen, basically forced through the weaker rules by himself. The importance of actually naming the source of the problem is even more magnified here, because Wetjen is in line to replace Chair Gary Gensler and run the CFTC. With 63 percent of Dodd-Frank rules <a href="http://www.davispolk.com/Dodd-Frank-Rulemaking-Progress-Report/">still unwritten by regulators</a>, a bank-friendly chairman overseeing derivatives would surely erode at an already-diluted law. Reformers may have arguments for treading lightly rather than singling out specific bad actors, but I don’t see why the press facilitates it. The public really needs to know exactly who is responsible for these cracks in the regulatory foundation.</p>
<p>The regulations in question concern how to manage derivatives—the bets on bets that accelerated the financial crisis when the housing bubble collapsed. While the derivatives market previously resembled the Wild West, Dodd-Frank’s Section 716 sought to increase transparency by running derivatives through a central clearinghouse called a “swap execution facility” (SEF), with trade information available to all market participants after the fact. Gensler also envisioned making all bids for derivatives contracts public <em>before</em> the trade. But those dreaded “Wall Street lobbyists”—actually, the two Republicans on the five-member commission and Democrat Mark Wetjen—forced a compromise system called “Request for Quotes,” or RFQ.</p>
<p>Under RFQ, a company wanting to sell a derivatives contract informs the swap execution facility. The SEF must then request price quotes from a predetermined number of banks before making the trade. What matters here is the specific number of banks the SEF must call. A higher number invites more participants into the marketplace and increases competition, with better pricing and less concentrated risk. A lower number limits who has the ability to submit a bid on any deal, and invariably that benefits the five biggest banks, which already <a href="http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&amp;u=2013_05_15_08_38_c4d6a07e1a4c4c6f932260909fe96d4f_PRIMARY.jpg">control 95 percent of the derivatives market</a>. Smaller competitors would be unlikely to get the call from the SEF, and without a heavy flow of trades, they won’t even stay in the market. “If you want RFQ, it should be a big number so that there’s as much pre-trade transparency as possible, and to increase competition,” says Dennis Kelleher of Better Markets, a key financial-reform advocate in Washington.</p>
<p>Gensler’s initial rule was RFQ to five banks. The rules adopted weakened this to RFQ to two for the first 16 months of the rule, rising to three thereafter. RFQ to one is basically the status quo, a totally secret market with only the participants in the trade knowing the details. So RFQ to two is the smallest possible increase. “It’s like shopping for a car but not knowing all the information until after the fact,” Kelleher says.</p>
<p>If you get through half of Protess’s <em>New York Times</em> article, you understand what happened. Gensler and Bart Chilton, the other Democrat on the CFTC, supported RFQ to five, but Wetjen objected to the number as arbitrary. Protess says straight out that Wetjen “has sided with Wall Street on other rules.” With Republicans favoring no transparency at all, Gensler and Chilton were outvoted and had to bow to Wetjen’s demands to get the full swap execution facility rule (which includes some positive measures) passed.</p>
<p>So who is Mark Wetjen, and how did this apparent Wall Street mole get a Democratic seat on the commission? Well, President Barack Obama appointed him in 2011. His <a href="http://blogs.platts.com/2011/07/22/garbage_man_bar/">past as a garbage man</a> notwithstanding, Wetjen’s selling point for a nomination was his seven years working as a key legislative aide to Senate Majority Leader Harry Reid, who delivered an <a href="http://www.youtube.com/watch?v=DpFzvNQOUBI">embarrassingly syrupy paean</a> to him at his confirmation hearing, lauding him as such a paragon of the human race that, according to Dennis Kelleher, “Jesus Christ wouldn’t qualify for his statement.” A popular Senate staffer signals the prospect of an easy confirmation, which Wetjen received, with few of his views on core financial issues revealed.</p>
<p>Since that time, Wetjen has systematically sought to weaken CFTC rules on multiple occasions. He asked for <a href="http://dealbook.nytimes.com/2012/06/22/a-debate-goes-behind-closed-doors/">several bank-friendly changes</a> to planned derivatives rules, <a href="http://www.cftclaw.com/2013/02/cftc-delays-swaps-vote/">delayed rules</a> by refusing to commit to voting for them, advocated <a href="http://dealbook.nytimes.com/2012/06/22/a-debate-goes-behind-closed-doors/">giving Wall Street additional time</a> to comply, <a href="http://dealbook.nytimes.com/2012/09/13/4-years-after-lehmans-demise-regulators-debate-overhaul/">publicly announced concerns</a> with Gensler’s proposed regulations in a speech to the main trade lobby for the industry (the International Swaps and Derivatives Association), and generally took Wall Street’s side, both in public and behind the scenes. In February, <a href="http://www.huffingtonpost.com/2013/02/28/cftc-derivatives_n_2784947.html">word leaked</a> that Wetjen wanted to weaken the RFQ proposal. He has become the <a href="http://www.ft.com/intl/cms/s/0/e3fd4f66-81d0-11e2-b050-00144feabdc0.html#axzz2TqBRA7cn">key swing vote</a> on the panel, threatening to side with Republicans and vote down rules unless his changes are implemented.</p>
<p>Yet the major reform organizations continue to <a href="http://blog.ourfinancialsecurity.org/2013/05/16/day-of-the-deregulators/">cite Wall Street lobbyists</a> when they wring their hands over the weakening of financial reform, even when <a href="http://www.bettermarkets.com/reform-news/today%E2%80%99s-cftc-rules-show-how-wall-street-killing-financial-reform-and-making-another-fina#.UZorABxe3my">talking about these CFTC rules</a>. There’s no question that Wall Street has a strategy to chip away at new rules, create additional loopholes, and preserve as much of their business model as possible. But that only works when individual regulators embrace their suggestions. Top industry lobbyists have met with Mark Wetjen repeatedly, but if he ignored their concerns, we wouldn’t be talking about how Wall Street killed financial reform.</p>
<p>Gensler’s term as chair actually ended April 13, but federal rules permit him to stay until the end of 2013. Gensler <a href="http://www.businessweek.com/news/2012-04-12/gensler-to-remain-as-cftc-chairman-past-expiration-date-tomorrow">agreed to stay on</a> until a successor is installed, and that successor is widely rumored to be Mark Wetjen. With Wetjen controlling the commission, it’s quite possible that he would delay the shift in RFQ from 2 to 3, and roll back several other rules, in line with <a href="http://www.sifma.org/newsroom/2013/sifma-strongly-disagrees-with-cftc%e2%80%99s-final-sef-rules/">changes sought by the industry</a>. “Mark Wetjen replacing Gensler as CFTC chairman would be a disaster,” says former congressional staffer and reform advocate Jeff Connaughton.</p>
<p>Among the many Dodd-Frank rules left for the CFTC to write, the most critical are the so-called cross-border regulations, governing whether the CFTC can monitor derivatives trades performed overseas by firms with substantial business in the United States. The notorious “London Whale” trade from JPMorgan Chase would fall into this category, as would American International Group’s credit default swaps that nearly melted down that firm. Wetjen has already advocated delaying cross-border rules and wants the plan completed as “interpretative guidance,” with less force of law. He has also <a href="http://www.reuters.com/article/2012/09/13/us-financial-regulation-swaps-idUSBRE88C1F020120913">pushed for “substituted compliance</a>," allowing overseas affiliates to follow foreign rules instead of the U.S. laws. The reaction would be obvious; big banks would offshore their trading desks, moving the risky trades overseas and away from CFTC oversight, siting trades wherever the rules are the weakest. Gensler has remarked that this would make 70 percent to 80 percent of all derivatives rules irrelevant.</p>
<p>With this context, Gensler’s desire to finalize rules now and accept compromises makes sense. He also wants to finish cross-border rules before leaving, but there are indications that Wetjen and the Republicans are waiting Gensler out to delay the process. Gensler may have agreed to the RFQ concession as a means to try to get cross-border done with Wetjen’s support. Reform advocates are similarly stuck between the possibility of influencing Wetjen and the imperative of calling out his bad actions.</p>
<p>What information has leaked out about Wetjen’s Wall Street biases may be the reason that the Obama administration is reportedly vetting someone else for the chair, former Goldman Sachs employee Amanda Renteria (Gensler also worked for Goldman, and yet he turned out to be a bold reformer). It’s also possible that Renteria is a distraction, someone the White House can point to as a fresh face while quietly elevating Wetjen. His growing profile in the press as a pro-bank commissioner may hurt Wetjen’s ascension, which is all the more reason to talk straight about who is weakening these rules.</p>
<p>Blame-shifting to amorphous systems and faceless “lobbyists” weakens our understanding of what is really going on in financial reform. Democratic accountability only works when the public has knowledge about what’s taking place. If Mark Wetjen is carrying Wall Street’s water, that’s important information to know, especially going into a confirmation hearing for his potential promotion, where he would take on additional powers. It’s time to stop being polite and start getting real about holding people like Mark Wetjen to account for their decisions.</p>
</div></div></div>Tue, 21 May 2013 13:01:03 +0000217773 at http://prospect.orgDavid DayenBanking Regulation: Closed for Businesshttp://prospect.org/article/banking-regulation-closed-business
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span style="line-height: 1.538em;"><span class="dropcap">T</span>hese are heady times for the </span><a href="https://prospect.org/article/banks-are-too-big-fail-say-conservatives" style="line-height: 1.538em;">bipartisan group of reformers</a><span style="line-height: 1.538em;"> seeking a safer and more manageable U.S. financial system. The leaders of this movement, Senators Sherrod Brown and David Vitter, </span><a href="http://www.bloomberg.com/news/2013-04-23/senate-too-big-to-fail-bill-boosts-big-banks-capital-standards.html" style="line-height: 1.538em;">introduced legislation</a><span style="line-height: 1.538em;"> yesterday to force the biggest banks to foot the bill for their own mistakes by imposing higher capital requirements. The bill would increase equity (either retained earnings or stock) in the financial system by $1.1 trillion and incentivize mega-banks to break themselves up, according to a </span><a href="http://hamiltonplacestrategies.com/wp-content/uploads/2013/04/GS-Report-On-Brown-Vitter.pdf" style="line-height: 1.538em;">Goldman Sachs report</a><span style="line-height: 1.538em;">. Brown and Vitter previewed the legislation earlier this week at the National Press Club, insisting that the new regulations on risky mega-banks would diminish threats to the U.S. economy and prevent taxpayers from having to bail out banks in the future</span><span style="line-height: 1.538em;">. Vitter also said the legislation would “level the playing field and take away a government policy subsidy, if you will, that exists in the market now favoring size.” With momentum, broadening support, and tangible legislation to push, bank reformers feel better positioned for success than they have since the passage of Dodd-Frank.</span></p>
<p>Or rather, they did until the Treasury Department poured a giant bucket of cold water on their effort. In a <a href="http://www.treasury.gov/press-center/press-releases/Pages/jl1902.aspx">speech</a> to the Levy Economics Institute of Bard College's annual Minsky Conference last Thursday, Undersecretary for Domestic Finance Mary Miller claimed that Dodd-Frank had already solved the “Too Big to Fail” problem. Miller indicated that mega-banks do not enjoy an unfair advantage in their borrowing costs and that recent boosts to capital standards were already working to strengthen the financial system. Having a big public speech at an important venue by a top official the week before the release of Brown-Vitter sends a clear message about the Treasury’s position. “She is not going off the cuff in a policy speech like that,” said former Special Inspector General for the Troubled Asset Relief Program (TARP) and persistent bank critic Neil Barofsky. “This seems like a carefully measured response to Brown-Vitter that the regulatory-reform shop, from the Treasury perspective, is closed.”</p>
<p>The resistance should not surprise anyone. Under Timothy Geithner, Treasury was openly hostile to far-reaching congressional proposals to constrain mega-banks. Despite the change in leadership at the department, many holdovers from the Geithner era, including Miller, still hold high-level positions. In his confirmation hearings, Treasury Secretary Jack Lew <a href="http://news.firedoglake.com/2013/02/14/lew-claims-too-big-to-fail-problem-solved-at-confirmation-hearing/">stated flatly</a> that Dodd-Frank had dealt with the Too Big to Fail problem. Most important, Lew works for President Obama: Reaching an agreement to break up mega-banks by forcing them to carry more capital would represent a tacit admission that Dodd-Frank, widely touted as a centerpiece of the president's first term, failed in its core mission of stabilizing the financial system.</p>
<p>What’s striking about Miller’s speech is how closely it mirrors the arguments set forth in several recent papers put out by the big banks, their lobbyists, and their allies. This includes the previously mentioned <a href="http://hamiltonplacestrategies.com/wp-content/uploads/2013/04/GS-Report-On-Brown-Vitter.pdf">report on Brown-Vitter by Goldman Sachs</a>; a <a href="http://www.financialservicesforum.org/index.php/news/press-releases/1406-logo">policy brief</a> by the Financial Services Forum and co-signed by the leading lobbyist groups for the banking industry; and a report with the cheery title “<a href="http://www.hamiltonplacestrategies.com/wp-content/uploads/2013/02/Banking-on-Our-Future-vF.pdf">Banking on Our Future</a>” by Hamilton Place Strategies (HPS), a public-relations firm staffed by top communications officials from the last three Republican presidential campaigns (HPS has <a href="http://baselinescenario.com/2013/02/07/a-growing-split-within-republicans-on-too-big-to-fail-banks/">admitted</a> that its clients include large financial institutions). All of these reports were released in the past few months in an effort to derail Brown-Vitter. <span class="pullquote">Given that Miller is a 26-year veteran of the investment-management firm T. Rowe Price, it is no surprise that she espouses Wall Street’s worldview.</span></p>
<p>For example, Miller discounts an influential <a href="http://www.bloomberg.com/news/2013-02-20/why-should-taxpayers-give-big-banks-83-billion-a-year-.html">working paper</a> from the International Monetary Fund (IMF) showing an $83 billion annual subsidy for mega-banks from their Too Big to Fail status by saying its evidence “predates the financial crisis and Dodd-Frank’s reforms.” This is precisely the argument the Financial Services Forum made, ignoring the fact that there are <a href="http://www.bis.org/review/r100406d.pdf">plenty</a> of <a href="http://seekingalpha.com/article/245888-the-invisible-subsidy-for-big-banks">post-crisis</a> <a href="http://www.bloomberg.com/news/2013-03-12/lobbyists-dispute-our-83-billion-argument-they-re-wrong.html">studies</a> that show the subsidies persist. Miller highlights the resolution authority granted to the Federal Deposit Insurance Corporation (FDIC) under Dodd-Frank, which allows the FDIC to wind down any systemically important financial institution verging on collapse rather than resorting to a bailout. She says that, to the extent that a cost-of-borrowing advantage exists for mega-banks, resolution authority “should help wring it the rest of the way out of the market.” In practically the same language, HPS writes that resolution authority “helps eliminate any potential funding advantage big banks are thought to have.” And in providing statistical support for increased capital, Miller notes, “The 18 largest bank-holding companies … doubled the amount of their Tier 1 common equity capital over the last four years.” Goldman Sachs uses precisely this statistic, writing that “common equity has doubled for U.S. banks” since the financial crisis.</p>
<p>Critics have assailed the bank-industry papers for their unrealistic views about the risks in the current system and over-optimistic evaluations of the impact of the most recent regulatory changes. The truth is that Dodd-Frank has emerged from the gate slowly, bank lobbyists have <a href="http://www.washingtonmonthly.com/magazine/march_april_2013/features/he_who_makes_the_rules043315.php">successfully gutted many of its provisions</a>, and much of it remains in flux. Miller approvingly highlights the Volcker rule as a key financial reform, but the final rule has been delayed nearly a year and has yet to be adopted. The proposed rule to tax systemically important institutions, for example, would cost <a href="http://finance.fortune.cnn.com/2013/04/16/cost-of-too-big-to-fail/?iid=HP_LN">as little as $28 million</a>, about .2 percent of annual earnings. Other provisions like resolution authority could prove unworkable in an interconnected, global financial system and amid the pressure of catastrophic collapse. Stanford economics professor Anat Admati, author of the book <a href="http://bankersnewclothes.com/"><em>The Banker’s New Clothes</em></a><em>,</em> does not believe Dodd-Frank will hold up in a crisis, comparing it to “preparing for a disaster like an earthquake by putting an ambulance at the corner.”</p>
<p>Since Brown-Vitter relies so heavily on imposing new capital requirements, Miller’s alignment with the industry on capital is the most telling section of her speech. Miller says that recently imposed capital rules—negotiated under an international process in Basel, Switzerland—are sufficient for banks to cover their own losses. But while the Basel rules as much as tripled capital requirements, as the <em>Financial Times</em>’s <a href="http://www.ft.com/intl/cms/s/0/966b5e88-c034-11df-b77d-00144feab49a.html">Martin Wolf quipped</a>, when the standards were released in 2010, “tripling almost nothing does not give one very much.” Critics also argue that current capital rules afford banks far too many opportunities to use creative accounting to game the system. The rules allow banks to calculate their capital needs using “risk-weighted” assets, counting each type of asset differently based on its assumed level of risk. Banks use risk-weighting to sharply reduce the amount of capital they have to hold—by as much as 50 percent, according to <a href="http://www.fdic.gov/about/learn/board/hoenig/capitalizationratios.pdf">some calculations</a>. In the event of a systemic collapse where all assets fail, regardless of the accounting games, banks would not have the funds necessary to stay solvent. Indeed, during the 2008 financial crisis, investment banks like Lehman Brothers were allowed by the Securities and Exchange Commission to risk-weight assets, and nearly all of them failed. Meanwhile, Sheila Bair at the FDIC rejected risk-weighting, and the commercial banks her agency insured fared better. Brown-Vitter would ban risk-weighting in their capital standards, but Miller simply counsels to stay the course.</p>
<p>Treasury’s rejection of Brown-Vitter has serious implications. On Monday, Senate Banking Committee chairman Tim Johnson reacted to Brown-Vitter by saying that regulators should finish implementing Dodd-Frank before Congress moves to enact additional reforms. Johnson didn’t cite Miller’s speech, but he didn’t have to: Democratic leaders in Congress will naturally resist turning against the wishes of their president and his economic team. And many rank-and-file lawmakers will cede to the perceived expertise of the Treasury Department. This gives Treasury outsized control of the financial-reform debate, which they’ve used to weaken and soften reforms at virtually every step of the Dodd-Frank process and beyond. In fact, Treasury officials <a href="http://nymag.com/news/politics/66188/index6.html">credit themselves</a> with stopping Sherrod Brown’s 2010 proposal to cap bank size. An anonymous senior official said at the time, “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”</p>
<p>This all means that Brown-Vitter is likely to sit on a shelf unless and until Wall Street generates another crisis. With Sherrod Brown in line to potentially <a href="http://www.huffingtonpost.com/2013/03/27/sherrod-brown-banking-committee_n_2962200.html">take over the Senate Banking Committee</a> in 2014, reformers may benefit from the wait. But it will be a wait.</p>
<p>Financial-reform advocates see Brown-Vitter as a <a href="http://www.huffingtonpost.com/sen-ted-kaufman/obamas-big-bank-opportuni_b_3109801.html">major opportunity</a> for President Obama to “get on the right side of history” and address the continued <a href="http://dealbook.nytimes.com/2013/04/10/seeking-relief-banks-shift-risk-to-murkier-corners/?emc=eta1">riskiness</a> and complexity of modern finance. But Treasury’s primary concern appears to be limiting any constraints on the <a href="http://jaredbernsteinblog.com/at-least-the-big-banks-are-kickin-it">record profits</a> of those mega-banks, rather than protecting the public from threats to the rest of the economy. As Barofsky concluded, “Treasury has defended the status of the Too Big to Fail banks every step of the way, why would they stop now?”</p>
</div></div></div>Wed, 24 Apr 2013 11:49:23 +0000217530 at http://prospect.orgDavid DayenThe Fed’s Foreclosure-Relief Failhttp://prospect.org/article/fed%E2%80%99s-foreclosure-relief-fail
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<p><span style="line-height: 1.538em;"><span class="dropcap">L</span>ike far too many Americans, Debbie Marler of South Point, Ohio has her own foreclosure horror story. It involves one house, seven fraudulent mortgage assignments, three foreclosures, as many states, and five years. It ruined her career prospects, threatened her retirement security, and turned her life into what she calls “a living nightmare.”</span></p>
<p>This week, Debbie walked to her mailbox and found what the federal government considers appropriate compensation for this odyssey of suffering at the hands of JPMorgan Chase, the nation’s largest bank.</p>
<p>A check for $800.</p>
<p>“I was speechless, just a complete shock,” Debbie said. “That doesn’t even pay for the damn U-Haul from when I moved out of the house in the first place.”</p>
<p>The money is a product of the Independent Foreclosure Reviews, part of an enforcement action against 14 banks for crimes committed in the foreclosure process. The IFRs, shepherded by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, were supposed to give anyone in foreclosure during 2009 or 2010—a total of 4.2 million borrowers—the chance to have their case investigated by an independent reviewer, and to be compensated if the review revealed harm. But the OCC and the Fed found the program <a href="http://www.nakedcapitalism.com/2013/04/david-dayen-gao-report-on-independent-foreclosure-reviews-expose-occ-feds-plan-to-deliberately-minimize-evidence-of-borrower-harm.html">so flawed and mismanaged</a> that they cancelled the reviews early this year and instead ordered the banks to pay $3.6 billion to all 4.2 million borrowers, whether they were harmed or not. The banks, not the regulators, determined how much cash each borrower would ultimately receive; the overwhelming majority received <a href="http://www.occ.gov/news-issuances/news-releases/2013/nr-ia-2013-60a.pdf">less than $1,000</a>. Despite the paltry payouts, the meager data we have on the reviews shows that as many as 30 percent of all borrowers covered <a href="http://www.huffingtonpost.com/2013/04/09/foreclosure-review-errors_n_3045941.html">potentially suffered serious harm</a> that led to the improper loss of their home. That matches up with Debbie’s story.</p>
<p>In 2008, Debbie was living with her husband in Greenville, South Carolina, working (ironically) as a real-estate agent. “You could see this coming, with all those mortgages sold to whoever came through the door,” Debbie recalled. With the real-estate market drying up after the collapse of the housing bubble, the family suffered a decline in income, as well as some unexpected medical bills. They could no longer afford their mortgage, and in May of that year, Chase Home Finance served them with a notice of foreclosure. Debbie and the bank worked out a six-month forbearance agreement, temporarily freeing the family from payments until they got back on their feet. But a month into the deal, tragedy struck, as Debbie’s husband died.</p>
<p>Debbie managed to secure the $6,000 that would make her current on the loan. But Chase claimed that the investor who owned her loan—the mortgage giant Fannie Mae—would not accept that arrangement and instead demanded $12,000 up-front to avoid foreclosure. Debbie didn’t have that. So in November 2008, she said, “Two big guys came to the door, said I had to be out in 10 days. I rented a truck and left the house.” A few months later, South Carolina <a href="http://www.cleveland.com/nation/index.ssf/2009/05/south_carolinas_highest_court.html">issued a moratorium on foreclosures</a> for properties owned by Fannie Mae. But it was too late for Debbie.</p>
<p>Debbie landed hundreds of miles away in West Virginia, where her daughter lived. She set up shop in her daughter’s basement, where she would stay for the next two years. The only solace was that the misery and uncertainty of foreclosure was complete; Chase had advertised the house for sale. Debbie’s credit score took a big hit, but she could try to pick up the pieces and move on.</p>
<p>But in September 2009, Chase suddenly dismissed the foreclosure, returning the property title to Debbie’s name. “I got a call from Chase asking me if I’d like to do a modification. I said, you must have me in the wrong pile. How can I get a modification if I’ve been foreclosed?”</p>
<p>It’s actually a depressingly common occurrence, known colloquially as “<a href="http://www.reuters.com/article/2013/01/10/us-usa-foreclosures-zombies-idUSBRE9090G920130110">zombie title</a>.” Banks regularly stop foreclosures when they determine it not worth their while to take possession of the home. The title then reverts to the previous owners, who find themselves legally liable for maintenance costs, property taxes, and any fees associated with the delinquent mortgage. Debbie now owed hundreds of thousands of dollars on a mortgage to an abandoned home.</p>
<p>In 2010, a Chase employee trundled out to West Virginia and served Debbie with another foreclosure notice; she hadn’t made any payments on her former home. Debbie investigated the maze of mortgage documents, and found that all the assignments of mortgage on the property were autographed by known robo-signers, who had no underlying knowledge of the mortgage. The documents were invalid in the eyes of a court, likely another reason why the foreclosure was never completed.</p>
<p>Chase told Debbie that in order to qualify for a “deed-in-lieu” foreclosure, which would voluntarily transfer ownership to the bank and satisfy the mortgage, she would have to fill out modification paperwork. The bank lost her paperwork five or six times, and then in May 2011, Chase dismissed the foreclosure again. In October of that year, Fannie Mae, serving as owner, filed for foreclosure number three, and this time, they sought a deficiency judgment, going after Debbie for any outstanding balance on her mortgage not covered after the foreclosure sale. “I paid $165,000 for the house, it was empty for three years, full of mold, appraised at $50,000. There was no way I could come up with the money to make up the difference,” Debbie said.</p>
<p>Now living in Ohio, Debbie dipped into her retirement account to pay a lawyer $7,500 to fight the deficiency judgment. The lawyer won the case, arguing that Fannie lost its right to seek deficiency judgment after the two prior foreclosures. But the judge did not award Debbie legal fees; she was still out $7,500. The foreclosure finally went through in January 2013, nearly five years after the initial notice.</p>
<p>Debbie submitted her case for the Independent Foreclosure Review before the program was scrapped. But she cannot figure out why she ultimately received only $800. Based on the <a href="http://www.occ.gov/news-issuances/news-releases/2013/nr-ia-2013-60a.pdf">payment agreement details</a>, borrowers who requested a review would get $800 if they submitted a modification request, but never received a decision from the bank. That’s not what happened to Debbie at all; she participated in a forbearance plan for several months. In fact, the category of borrowers who met forbearance requirements and were nonetheless put into foreclosure are entitled under the payment plan to $24,000. Debbie expected that amount. There’s no way to check Debbie’s specific foreclosure circumstances, as the reviews have not been released, and regulators allowed banks to determine specific borrower compensation without oversight. Debbie also has no recourse; there is no appeals process for the compensation amount. She could sue JPMorgan Chase for additional restitution, but if she had the kind of money to pursue a lawsuit against a giant bank, she would never have fallen into foreclosure in the first place.</p>
<p>Adequately compensating homeowners was <a href="http://www.salon.com/2013/04/15/fed_messed_with_the_wrong_senator/">never a goal</a> of the foreclosure reviews. For context, banks paid the third-party consultants who performed the reviews (and according to whistleblowers, helped <a href="http://www.nakedcapitalism.com/2013/04/launching-our-first-free-ebook-on-the-foreclosure-review-fiasco.html">deliberately minimize evidence of borrower harm</a>) roughly $20,000 a pop, a windfall of $2 billion. Homeowners who suffered the abuse netted less than $1,000 on average. Regulators could not even <a href="http://ftalphaville.ft.com/2013/04/15/1459852/ultimate-statistics-senator-takes-on-us-regulators-9-3bn-foreclosure-agreement/">give Congress an accurate percentage</a> of borrowers harmed by illegal foreclosure processes, calling into question how they arrived at the $3.6 billion compensation figure in the first place.</p>
<p>Meanwhile, Debbie’s career as a realtor imploded when the notice of foreclosure hit the newspapers back in 2008—“my credibility went in the toilet,” she said. The defaulted debt will remain on her credit report for another seven years. Debbie eventually got another job and moved out of her daughter’s basement, but she saw her finances obliterated by this ordeal, along with her faith in the system. “I’ve lost so much patriotism for this country,” Debbie said matter-of-factly. “We’ve seen this man-made, greed-driven collapse of our economy, and then we gave the perpetrators blanket immunity.”</p>
<p>Debbie has plans for the $800, but it’s not for her. Through the Occupy Our Homes network, she learned about a former Atlanta police officer named <a href="http://start2.occupyourhomes.org/petitions/us-bank-don-t-evict-cancer-patient-jaqueline-barber-keep-her-in-her-home-1">Jacqueline Baker</a>, currently fighting both foreclosure and bone marrow cancer. After years of staving off eviction by US Bank, Baker secured an agreement to buy back the home at a market rate. But US Bank refuses to finance the loan, leaving Baker, whose foreclosure makes her ineligible to obtain a mortgage, completely stuck. Debbie, who felt a kinship with the story due to medical problems in her own family (her grandson has leukemia), plans to give her $800 check to the Atlanta woman, to go toward a down payment, should Baker secure the financing.</p>
<p>“I don’t want their filthy money,” Debbie said, referring to JPMorgan Chase. “I’d rather take it and give it to someone who’s still fighting, someone who still has some hope.”</p>
</div></div></div>Thu, 18 Apr 2013 12:21:34 +0000217481 at http://prospect.orgDavid DayenBanks Are Too Big to Fail Say ... Conservatives?http://prospect.org/article/banks-are-too-big-fail-say-conservatives
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<p><span class="dropcap">M</span>embers of the Federal Reserve don’t usually make the rounds at partisan gatherings. But amid the tri-cornered hats and “#StandWithRand” buttons of last week’s Conservative Political Action Conference (CPAC)—the largest annual gathering of conservatives in the country—was Richard Fisher, president of the Dallas Federal Reserve Bank. In a <a href="http://dallasfed.org/news/speeches/fisher/2013/fs130316.cfm">Saturday morning speech</a>, Fisher quoted Revolutionary War hero Patrick Henry, who once said that while “Different men often see the same subject in different lights,” such quibbling had to be set aside in a time of “awful moment to this country.”</p>
<p>Fisher described the current time as an era of economic injustice in which the nation’s largest banks threaten our financial stability and act with immunity. He said that the Dodd-Frank financial reform law did not go nearly far enough to fix the problem, and that mega-banks still profited from being “Too Big to Fail.” His solutions included a proposal to limit the total assets held by the biggest financial institutions, keeping them at a size that would make them “small enough to save.” And he called on citizens of all political stripes to join him in this cause. “The American people will be grateful to whoever liberates them from a recurrence of taxpayer bailouts,” Fisher concluded. It was an indication of just how bipartisan the support for breaking up the big banks has become.</p>
<p>It may be surprising that conservatives—whose party just ran a private-equity tycoon for president—would be clamoring for Wall Street banks to be cut down to size. But over the last few years, conservative intellectuals—from economists and central bankers to think-tankers and high-profile pundits—have come to the conclusion that the largest institutions remain Too Big to Fail and that, in ways big and small, receive unfair financial advantages over their smaller rivals. This sort of sentiment on the right is of course not new; the Tea Party was propelled by anger against bailouts. But what is new is the rare alignment of the ivory tower and the grassroots. What’s more, these forces have penetrated the Beltway: Senate Democrats and Republicans are actively discussing legislation that would cap the size of banks, impose higher capital requirements, and separate commercial bank functions—taking deposits and making loans—from investment activities. With all the current gridlock in Congress, breaking up the banks may actually represent a rare moment of agreement between the right and left.</p>
<p>The roots of this emerging consensus starts with the 2008 financial crisis, whose subsequent $700 billion bailout of Wall Street’s major financial institutions touched off frustration and anger across the political spectrum. Fueled by a deep skepticism of elites, the grass roots on both the right and left—the Tea Party, Occupy Wall Street—railed against the spectacle of taxpayer dollars handed to irresponsible institutions that caused the Great Recession. </p>
<p>The Tea Party’s critique and the conservative academic diagnosis serve as a kind of a funhouse-mirror version of the way liberals talk about these issues. Rather than assailing corporate malfeasance, conservatives talk about government overreach. Fundamentally, what drives opposition to banks on the right is the sense that government has rigged the game to “pick winners and losers” by delivering giant subsidies to the nation’s biggest banks and, after they get so big their collapse threatens the entire financial system, bailing them out when they run into trouble. “I’ve talked about this issue in more town hall meetings than maybe any Republican. There’s been a serious erosion of trust in our institutions of power,” former Utah Governor and presidential candidate Jon Huntsman said at a panel discussion in Washington earlier this month, “and that’s directly tied to this whole subsidy issue.” The theory is simple: If investors believe a mega-bank will get bailed out if it gets into trouble, without any losses forced on creditors, they have more confidence in lending to them than their smaller rivals, giving them a <a href="http://www.bloomberg.com/news/2013-02-28/too-big-to-fail-rules-hurting-too-small-to-compete-banks.html">competitive advantage and incentivizing them to grow large.</a></p>
<p>You can quantify the subsidy by calculating the cost of funding for the biggest banks relative to community or regional banks. A <a href="http://www.imf.org/external/pubs/ft/wp/2012/wp12128.pdf">recent study by the International Monetary Fund</a> showed that mega-banks borrow about 0.8 percent more cheaply than their smaller rivals. According to a Bloomberg analysis of the findings, this amounts to a taxpayer subsidy of $83 billion a year, equalling virtually all of the annual profits enjoyed by the largest banks. Some have <a href="http://dealbreaker.com/2013/02/why-should-taxpayers-give-big-banks-a-subsidy-of-83-billion-per-year-or-any-other-made-up-number-for-that-matter/">quibbled</a> with the $83 billion number, but nobody <a href="http://images.politico.com/global/2013/03/10/financial_industry_addresses_alleged_large_bank_subsidy_11_march_13.html">but the banking industry</a> doubts the reality of the subsidy; in fact, <a href="http://www.nakedcapitalism.com/2013/02/big-bank-welfare-queens-unprofitable-without-government-subsidies-so-why-dont-we-regulate-them-like-utilities.html">some</a> put the number <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech615.pdf">higher</a>. Fisher noted in his CPAC speech that this creates an unlevel playing field for the biggest banks, who are favored by creditors. “Why should a prospective purchaser of bank debt practice due diligence if, in the end ... it is widely perceived that the issuing institution will not be allowed to fail?”</p>
<p>It’s hard to argue with the evidence as to bank size. The nation’s six top banks, which held assets equaling 18 percent of GDP in 1995, have now ballooned to 63 percent of GDP. And since the 2008 financial crisis, the banks that caused it have grown in size by between 20-25 percent thanks to a series of hastily arranged mergers and government-run, emergency-lending vehicles that nursed them back to profitability. Conservative Thomas Hoenig, whom Republicans nominated as vice chair of the Federal Deposit Insurance Corporation (FDIC), has <a href="http://www.fdic.gov/about/learn/board/hoenig/capitalizationratios.pdf">measured U.S. mega-banks</a> using the same accounting standard used in Europe, which places the full risk of derivatives trades on the balance sheet. Under this standard, three U.S. banks—Bank of America, J.P. Morgan Chase, and Citi—are the three largest banks in the world. </p>
<p>This gives these mega-banks such a dominant position in the economy that they are virtually guaranteed to receive a bailout rather than be allowed to fail. “Big banks have too much power. In the middle of a crisis, no official wants to be the one who failed to save the financial system,” argues conservative Arnold Kling of George Mason University, who has been <a href="http://www.nationalreview.com/articles/229442/break-banks/arnold-kling">out front on the need to break up mega-banks</a>. </p>
<p>In addition, the availability of cheap debt allows mega-banks to finance their operations through borrowing instead of equity. Hoenig’s apples-to-apples balance-sheet comparison of the U.S. mega-banks shows that they have an average capital ratio of 3.68 percent; for every $100 a mega-bank lends out, it borrows $97 and holds only $3 in stock or cash reserves. “That means that a 3.7 percent drop in the value of assets would cause the banks to be insolvent,” said Neil Barofsky, former Special Inspector General of the TARP bailout program.</p>
<p>So not only does power get concentrated in the hands of a few financial firms, but those firms are encouraged by the implicit subsidies to take on outsized risks, and are assured of a bailout if things go awry. “If you’re an institution and you think you can have a lot of leverage and put it on the government if it goes bad, you’re going to have a lot of risk,” explains Sheila Bair, a Republican and former chair of the FDIC. Conservatives say this scheme undermines economic freedom and makes it impossible for the market to function properly to reward prudence and discipline recklessness. “By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together,” argued conservative pundit George Will in a recent <a href="http://articles.washingtonpost.com/2013-02-08/opinions/36993798_1_community-banks-largest-banks-glass-steagall-act">column</a>. “Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism.” </p>
<p><span class="pullquote">It is not just pundits who see the problem: The list of conservative economists who share this view is quite comprehensive, from Nobel Prize winner <a href="http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/harsh_predictio.html">Ed Prescott</a> and <a href="http://online.wsj.com/article/SB124157669428590515.html">Glenn Hubbard</a> to the late Milton Friedman co-author <a href="http://online.wsj.com/article/SB122428279231046053.html">Anna Schwartz</a>, and <a href="http://www.nationalaffairs.com/publications/detail/curbing-risk-on-wall-street">Luigi Zingales</a>. </span>They agree on both the nature of the problem, and that technocratic regulatory fixes like Dodd-Frank will not solve the problem. Classical Chicago School economists like George Stigler argued that interest groups would dominate regulatory agencies and use them to advance their commercial interests, a theory known as “regulatory capture.” Regulators are both outgunned and simply confused by the stunning complexity of mega-bank activities. And law enforcement has been intimidated into letting banks off the hook for a seemingly unending series of criminal scandals. Attorney General Eric Holder <a href="http://www.salon.com/2013/03/07/holder_banks_too_big_to_prosecute/">recently admitted in Congressional testimony</a> that the size of the largest banks has a material effect on this no-prosecution stance, telling senators that “if you do bring a criminal charge, it will have a negative impact on the national economy.” </p>
<p>The problem on both the right and left has long been translating the fervor against the mega-banks into action. The Tea Party’s sole prescription for solving Too Big to Fail was to simply let banks collapse. But conservative academics, despite their belief in regulatory capture, are more comfortable than the conservative grass roots with setting up simple rules that would eliminate subsidies, reduce bank size and end Too Big to Fail. “It’s not possible to let all banks fail if it’s a systemic issue,” says Jim Pethokoukis of the American Enterprise Institute, who wrote one of the <a href="http://www.aei.org/article/economics/financial-services/banking/too-big-for-comfort/">definitive conservative briefs</a> for breaking up the banks in <em>The Weekly Standard</em> last year. “It’s appropriate to counteract it through government policy, in trying to restore market forces and competition.”</p>
<p>In favoring these policies, conservatives are re-connecting with their inner populist, defying the stereotype that Republicans support the banking establishment and abhor any regulation on industry. “If you are conservative you are skeptical of concentrated power,” said former Reagan speechwriter Peggy Noonan in <a href="http://online.wsj.com/article/SB10001424127887324081704578234210851129172.html">an op-ed in <em>The Wall Street Journal</em></a>. “Republicans should go to the populist right on the issue of bank breakup.” </p>
<p> </p>
<p><span class="dropcap">T</span>he new surge of interest in ending Too Big to Fail on the right has converged with an existing effort on the left, and it’s translating into legislative action. Sherrod Brown, the populist progressive senator who just won re-election in Ohio, has been discussing solutions to the mega-bank problem with up to ten Republican senators. Against all expectations, his main partner is David Vitter, a Republican and fellow member of the Senate Banking Committee. “I looked across the committee room one day, he was questioning [Treasury Secretary] Ben Bernanke,” said Brown in an interview about his Republican colleague. “He was really tough on higher capital standards. I figured he could be an ally, he did have a concern that banks were too big, too economically powerful and too politically powerful.” </p>
<p>The unlikely duo began working several months ago. They started by <a href="http://www.brown.senate.gov/newsroom/press/release/sens-sherrod-brown-david-vitter-press-fed-chairman-bernanke-on-capital-standards-">urging the Federal Reserve</a> and <a href="http://www.brown.senate.gov/newsroom/press/release/sens-sherrod-brown-david-vitter-ask-us-banking-agencies-to-simplify-and-strengthen-bank-capital-standards">other regulators</a> to use their power to increase capital standards on the largest banks, which typically deal in riskier activities and therefore require more of a backstop. The idea of forcing banks to cover their own responsibilities has been bolstered by a recent book from economists Anat Admati and Martin Hellwig called <a href="http://bankersnewclothes.com/"><em>The Bankers’ New Clothes</em></a>, which endorses stronger capital standards and has earned praise on the <a href="http://www.slate.com/articles/business/moneybox/2013/03/bankers_new_clothes_anat_admati_and_martin_hellwig_argue_that_the_real_problem.html">left</a> and <a href="http://johnhcochrane.blogspot.com/2013/03/the-bankers-new-clothes-review.html">right</a>. Bank capital rules, based on international standards and modified by national regulators, are often impenetrable and easily gamed through fancy accounting; Brown and Vitter would like to see the rules simplified. “Wall Street banks—not Main Street taxpayers—should be on the hook for their own mistakes,” Brown and Vitter wrote. </p>
<p>In January, Brown and Vitter unanimously passed legislation on the Senate floor requiring the nonpartisan Government Accountability Office (GAO) to conduct a study to determine whether mega-banks enjoy borrowing subsidies from their Too Big to Fail status, the subsidy conservatives believe to be at the heart of the problem. While the House never took it up, GAO <a href="http://economix.blogs.nytimes.com/2013/02/28/bernankes-credibility-on-too-big-to-fail/">agreed to conduct the study</a>. GAO’s reputation as an authoritative source in Washington could change the political dynamic on the subsidy question. “We may see more support for dealing with this after the GAO study,” says Jim Pethokoukis. “It could free up those supporting quietly to be more vocal.” </p>
<p>At the end of February, Brown and Vitter announced they would <a href="http://thehill.com/blogs/floor-action/senate/285611-brown-vitter-to-introduce-bill-addressing-too-big-to-fail-banks?wpisrc=nl_wonk">work on legislation</a> to incorporate much of the thinking about how to deal with runaway banks. Brown tried this once with an amendment to Dodd-Frank with Senator Ted Kaufman that would have capped mega-bank assets to a percentage of GDP. It received 33 votes in 2010, with only 3 Republicans supporting. Brown’s discussions with colleagues leave him thinking Brown-Kaufman could get at least 50 votes today, and the bipartisan nature of the Brown-Vitter effort could mean that whatever results will have an even better chance at broad support. In a <a href="http://www.huffingtonpost.com/2013/02/28/sherrod-brown-banks-david-vitter_n_2782665.html?utm_hp_ref=politics">floor speech</a> announcing their joint effort, Vitter said, “I don’t know if we quite define the political spectrum of the United States Senate, but we come pretty darned close. And yet, we absolutely agree about this threat.” </p>
<p>Vitter has a stated interest in tightening capital requirements, but Brown’s ideas on capping bank size, will play a part in the legislative discussions as well. Brown and Vitter are looking at other options from across the political spectrum. For example, conservative Thomas Hoenig of the FDIC believes that the safety net for banks has grown too large, and should be confined to the commercial banking system. “Spin the higher-risk trading activities out to a different organization, so the safety net is not directly exposed to those institutions,” Hoenig opines. Incredibly, this is now the position of <a href="http://www.cnbc.com/id/48315170">former Citigroup head Sanford Weill</a>, whose bank lobbied to eliminate the Depression-era Glass-Steagall Act, which set up separations between commercial and investment banks. Jon Huntsman and Sheila Bair want to see a fee assessed on Too Big to Fail banks to cover the implicit subsidy from lower costs to funding in the market. </p>
<p>“We’re working all of these ideas on separate tracks,” Senator Brown said. He wants to build support across all these ideas: breaking up banks, ramping up capital standards, dealing with the implicit subsidy, and walling off commercial and investment activities. He believes that each advance helps the other, and that with such a entrenched problem, attacking on all angles is the most prudent strategy, increasing the odds that one reform actually might get through. </p>
<p> </p>
<p><span class="dropcap">D</span>espite the convergence of opinion between the grassroots, conservative thinkers, and lawmakers, the obstacles to reform are obvious. Financial institutions didn’t grow to their current size without obtaining substantial political power. Wall Street showers lawmakers with contributions and lobbies against any restrictions on their activities in the legislative or regulatory sphere. More important, government officials constantly hear and internalize the industry perspective on financial issues, a “cognitive capture” that sidelines reform voices. “This town sings with an upper-class accent,” quips Sherrod Brown. </p>
<p>This is a particular problem for conservatives wanting to change their party’s dominant viewpoint, even if it would help minimize the perception that Republicans are the party of bankers and the one percent. “I interviewed Mitt Romney during the campaign and asked him about this,” says Pethokoukis. “He was simply not aware of a problem with bank size. He just wasn’t prepared to answer.” </p>
<p>Complicating this further is the fundraising advantage Republicans gained from Wall Street in 2012, a reversal from 2008. Conservative Matthew Continetti writes of a <a href="http://www.weeklystandard.com/articles/double-bind_706659.html">double bind</a> for Republicans. Policies that may be attractive to the public, like breaking up the banks, contrast directly with institutional funding sources for Republican campaigns. Already, a backlash to the populist surge against the banks is forming on the right; a consulting firm called Hamilton Place Strategies (made up of aides to the last three Republican Presidential nominees) released a <a href="http://baselinescenario.com/2013/02/07/a-growing-split-within-republicans-on-too-big-to-fail-banks/">paper</a> last month arguing in favor of big banks’ role in society. </p>
<p><span class="pullquote-right">But the academic conservative consensus has at least broken through the industry talking points and gotten traction on Capitol Hill. As a party, the GOP has recently been more responsive to its grassroots.</span> That’s the dynamic we saw during Rand Paul’s recent 13-hour filibuster. Neoconservatives objected to Paul’s more isolationist, civil-libertarian stance against targeted killing policies, but within hours, practically every Senate Republican enthusiastically endorsed Paul’s filibuster—even Minority Leader Mitch McConnell. Because Republicans fear their base, if the base clamors for a crackdown on Wall Street banks, the political dynamic could work in favor of the reformers, even if big-money contributors object. </p>
<p>This was evident in previous trans-partisan coalitions during the Dodd-Frank debate, particularly in the movement to audit the Federal Reserve, led by liberal firebrand Alan Grayson and libertarian Ron Paul. In one of the only truly bipartisan successes of the Obama era, Grayson-Paul passed both houses of Congress with overwhelming support. Grassroots activist intensity from both parties made the issue impossible for insiders to combat. With the consensus forming on the right, and newly elected Senator Elizabeth Warren providing <a href="http://www.youtube.com/watch?v=dxhyUAWPmGw&amp;feature=youtu.be">high-profile</a> <a href="http://www.youtube.com/watch?v=7cKTBy7_S_I&amp;feature=youtu.be">advocacy</a> against Too Big to Fail on the left, reformers on both sides could be able to muster a groundswell of support. “People are more educated about this, much more than five years ago,” said Sherrod Brown. “I just saw the power of the Internet in my own campaign. We can do that again here.” </p>
<p>Another major obstacle to the entire effort is a White House that believes they solved this problem with Dodd-Frank. That was the assessment of <a href="http://news.firedoglake.com/2013/02/14/lew-claims-too-big-to-fail-problem-solved-at-confirmation-hearing/">Treasury Secretary Jack Lew</a> (a former Citigroup executive) in his confirmation hearing in February. Under Tim Geithner, the Treasury Department actively halted Brown-Kaufman (one anonymous Treasury official said <a href="http://nymag.com/news/politics/66188/index6.html">it would have passed with their support</a>). Overall, the Too Big to Fail issue ranks low on the administration’s priority list, below immigration reform, gun safety, and the federal budget. Senator Brown has not yet held direct discussions with the White House on his legislation, and only a few with Treasury. “You need more leadership from the administration to make this happen,” said Sheila Bair. “We didn’t have much on Dodd-Frank.”</p>
<p>Reformers of both parties agree that Dodd-Frank does not go far enough to deliver the changes needed to end Too Big to Fail and create a safer banking system, especially since only around <a href="http://www.davispolk.com/Dodd-Frank-Rulemaking-Progress-Report/">a third of the rules under the law have even been implemented</a> (banks successfully <a href="http://www.washingtonmonthly.com/magazine/march_april_2013/features/he_who_makes_the_rules043315.php">delayed many rules and gutted others</a> as they worked through the labyrinthine rule-making process). “There has to be a broader attack,” said Sherrod Brown. </p>
<p>Regardless of the outcome, the bipartisan movement to end Too Big to Fail has already paid dividends. Regulators who deal with mega-banks every day, who are typically quiet and cautious in their public pronouncements, have begun to <a href="http://www.huffingtonpost.com/2013/02/19/daniel-tarullo-banks-too-big-to-fail_n_2717553.html">identify the problem</a> and <a href="http://www.ft.com/intl/cms/s/0/1a05054e-8105-11e2-9908-00144feabdc0.html#axzz2M9VNosPU">challenge the industry</a>. This directly results from the positive feedback loop generated by the reformers, believes Simon Johnson, former chief economist for the IMF. “The political atmosphere matters,” he said. “Regulators are watching the political debate, and an insistent effort gives them great support to do the right thing.” It also helps to have an issue where some conservatives actually want to get to a solution instead of reflexively blocking anything that deviates from the status quo. Because they view taking down big banks as a proxy for taking down Big Government, they favor government action to achieve the goal. And that creates opportunities for strange bedfellows and bottom-up alliances.</p>
<p>Even if the current legislative effort ends in failure, it could assemble evidence and refine solutions to be used when the mega-banks generate another crisis. “Ultimately this is an ‘End of Days’ plan, something you can take off the shelf for next time,” says Neil Barofsky. Nobody wants to wait that long, and if both parties continue to work together, maybe they won’t have to.</p>
</div></div></div>Thu, 21 Mar 2013 13:15:37 +0000217201 at http://prospect.orgDavid DayenFinancial Reform's Triple "F" Ratinghttp://prospect.org/article/financial-reforms-triple-f-rating
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p><span style="line-height: 1.538em;"><span class="dropcap">E</span>arlier this month, the Justice Department and 16 state attorneys general sued the Standard and Poor’s (S&amp;P) credit-rating agency, accusing the company of improperly inflating the ratings of 40 collateralized debt obligations (CDOs)—essentially, securities made up of other mortgage-backed securities—at the height of the housing bubble. According to the suit, S&amp;P misled investors by rating the risky securities as "triple-A," super-safe investments. But the purchases turned into massive investor losses when the bonds failed after the bubble collapsed. Using emails and other communications, state, and federal prosecutors will seek to prove that S&amp;P knew the securities were junk but rated them highly for the most obvious of reasons: to make more money.</span></p>
<p>The lawsuit gets at a major problem at the heart of the credit-rating business: Rather than investors paying rating agencies to assess the value of securities it is the issuers of the securities themselves who pick up the tab. It is naturally in the interest of issuers—typically big banks—for rating agencies to rate their products highly, which increases the chances investors will buy them. Under this "issuer-pays" model, the largest credit-rating agencies then have a strong incentive to highly rate securities for issuers who can give them more business in the future. This is said to be part of the reason rating agencies ignored the risks from the highly complex securities and simply let everything pass; in one communication revealed in the filing, an S&amp;P employee boasted, "It could be structured by cows and we would rate it."</p>
<p>The case against S&amp;P is largely consistent with reports from the Senate Permanent Subcommittee on Investigations and the Financial Crisis Inquiry Commission, which showed that the promise of future profits drove credit-rating agencies to rate toxic securities highly. As Reuters financial reporter <a href="http://blogs.reuters.com/bethany-mclean/2013/02/13/the-weird-unsatisfying-case-against-sp/">Bethany McLean</a> points out, the other big rating-agencies, Fitch and Moody’s, engaged in similar conduct. "<span class="pullquote">The argument can be made that the case against S&amp;P is an indictment of the entire rating agency business model," said Jeffrey Manns, Associate Professor of the George Washington University Law School.</span></p>
<p>This leads to an obvious question: If the rating agencies have an inherent conflict of interest—something even the Justice Department, which is notoriously averse to prosecuting financial crisis-era cases, sees as illegal activity—why has the government not yet overhauled the way rating agencies get paid? As it turns out, the Dodd-Frank financial-reform law started a process to replace the current payment, but the Securities and Exchange Commission (SEC), which is tasked with writing the final rule, has yet to take action. The sponsors of the overhaul want to pressure regulators to finalize the rule, and eliminate this conflict of interest lurking in the heart of the financial system.</p>
<p>An alternative to the "issuer-pays" model for compensating rating agencies has already been crafted. During the Dodd-Frank debate, Senators Al Franken and Roger Wicker led a bipartisan effort to replace the issuer-pays model. Under the Franken-Wicker proposal, the SEC would create a self-regulating organization comprising various stakeholders that included investors. This new organization would then randomly assign securities to rating agencies. Performance and accuracy would then determine which agencies got more work in the future. Instead of a rating agency having to cater to the whims of the big banks to increase their profits, they would simply have to do their job well.</p>
<p>The Franken-Wicker plan passed with 64 votes in the Senate. But in the Dodd-Frank conference committee, it got watered down. In the final bill, the Government Accountability Office and the SEC were tasked with conducting studies of the current issuer-pays model and its potential alternatives. Under the statute, the SEC must implement either the Franken-Wicker random assignment model or some other solution that it deems more feasible. This gives the SEC significant wiggle-room—the easiest thing to do would be to maintain the status quo, after all. </p>
<p>Nearly two and a half years after the passage of Dodd-Frank, the SEC finally <a href="http://www.sec.gov/news/studies/2012/assigned-credit-ratings-study.pdf">released their study</a>, six months past the deadline. The study, based mostly on public comments solicited by the SEC, suggested that inherent conflicts of interest exist in the issuer-pays model but took no position on what should be done to address the problem; it merely offered a number of alternatives—seven in all—and listed the pros and cons of each according to various individuals and organizations who sent public comments, including the rating agencies themselves. Not surprisingly, most of the comments critical of changing the issuer-pays model came from the industry. In the end, the only firm commitment the SEC made in the study was to do additional study. "The staff recommends that the commission, as a next step, convene a roundtable at which proponents and critics of the… courses of action are invited to discuss the study and its findings," says the report.</p>
<p>This strikes many observers as an effort by the SEC to move the timeline for changes further and further out, and perhaps eventually kill them through delay. As law professor Jeffrey Manns, who <a href="http://www.sec.gov/comments/4-629/4629-25.pdf">submitted one of the public comments</a> to the commission, put it, "They embraced the classic D.C. strategy of kicking the can down the road." He acknowledges the need to be deliberative and careful about what would result in a significant overhaul of the credit rating agencies. "But the SEC has now had two and a half years to think about this," he added. "The concern would be that the longer the SEC takes, the less political will there would be to see this through. The sense of urgency is not as pronounced as it has been."</p>
<p>That’s what Franken and Wicker want to prevent. Last week, they urged the SEC to convene the roundtable, the next step in the process, within the next three months. And they want a written timeline, complete with quarterly updates, for additional steps, including the promulgation of new rules on compensation. "Millions of investors are still reliant on credit ratings that we simply can’t trust," said Franken.</p>
<p>Franken and Wicker got Chuck Schumer, a member of the Democratic leadership, to sign on to their letter to the SEC, giving it additional muscle. "In my time in Washington, I’m struck by how much weight a letter like this carries," said Wicker. "I expect them to follow our model. If they don’t, there are many avenues for enators to take."</p>
<p>Part of the delay, Franken believes, stems from the lack of a fully staffed SEC. The departure of Chairman Mary Schapiro in December put them one commissioner down, and with the subsequent 2-2 deadlock between Democrats and Republicans, no big rules changes have proceeded. But Franken intimated that this offered an opportunity for him and Wicker to exercise more pressure. "We have spoken to all the current commissioners, and we will be speaking to Mary Jo White," Franken said, referring to President Obama’s nominee for chair. "There will be confirmation hearings, chances to talk to her." This wasn’t a sure statement that White’s confirmation could be made smoother with a firm commitment to move forward on an overhaul of the rating agency compensation model, but it was certainly close. </p>
<p>With private securitizations for mortgages nearly non-existent, and the market for asset-backed securities down significantly from its peak in 2006, continued rating agency malfeasance may have less of an impact right now than it did right before the financial crisis. But "the further the crisis retreats,” warns Jeffrey Manns, “the more likely market participants will return to similar patterns."</p>
</div></div></div>Thu, 21 Feb 2013 15:05:47 +0000216899 at http://prospect.orgDavid Dayen